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Corona Policies: “The Virus Must Be Contained Before the Economy Can Recover”

  • July 13, 2020

DER SPIEGEL: That is exactly what economists are doing these days. They are predicting a wave of bankruptcies in the autumn.

Fuest: It will not be possible to avoid insolvencies, but it remains to be seen whether there will be a wave of insolvencies. The hope that the fast crash would be followed by an equally fast rebound was overly optimistic. We have to accept that the crisis will last a long time and that jobs will be lost. Even (Germany’s) Kurzarbeit (government-subsidized work furlough) program cannot prevent this entirely.

DER SPIEGEL: What do you mean?

Fuest: The Kurzarbeit program ensures that employees remain in their current jobs. That’s good if the economy looks about the same after the crisis as it did before. If, however, there are fundamental changes, because fewer flights are flown after the coronavirus, for example, then furlough programs can also impede necessary changes.

DER SPIEGEL: During the crisis, the government decided to extend the work furlough allowance. Was that the wrong decision?

Fuest: No, the idea was to provide security to the affected people and to promote consumer spending. But the longer the crisis lasts, the more imperative it becomes to allow for structural change.

DER SPIEGEL: What can the government do?

Fuest: It could promote training and the creation of new companies. It could reduce bureaucracy for companies and lower their tax burden.

DER SPIEGEL: Many companies currently aren’t generating any profits anyway, so what’s the point of tax breaks?

Fuest: In the current crisis situation, the focus should be on loss compensation and accelerated depreciation. But it terms of perspectives, it is important that we reduce the corporate tax to 25 percent and announce the change quickly, as many countries around us have done.

DER SPIEGEL: Once the crisis is over, the first thing we need to do is reduce sovereign debt. Wouldn’t that speak for higher taxes?

Fuest: When economic growth returns, the national budget will receive automatic relief. If that isn’t enough, then both expenditure cuts and higher taxes will have to be considered. But then it’s not corporate or income taxes that should be raised, but rather the VAT or property taxes, which are less hostile to growth.

DER SPIEGEL: In the crisis, small incomes are proving to be the main burden. And you want to increase the value-added tax, which puts a particular burden on low-income earners?

Fuest: It will only do so if it is passed on to consumers in the form of higher prices. But we are seeing, particularly with the reduction in VAT, that this is only happening to a very small extent. Nevertheless, social transfers like the amount paid through Germany’s Hartz IV long-term welfare program should be increased to offset the burden created by a VAT increase.

DER SPIEGEL: Will the coronavirus crisis increase inequality?

Fuest: It is expected that the crisis and accelerated structural change are likely to cause an even greater divergence between the incomes of high- and low-skilled workers than before. However, this cannot be offset by the tax and transfer system alone. Instead, we need to invest in the school and education system. We need programs that empower workers to succeed in a more digitalized world, and we need more schooling for people from less educated backgrounds.

DER SPIEGEL: Some 750 billion euros are to be funneled through the European Union recovery fund to countries especially hard hit by corona. Is this the right instrument?

Fuest: I am in favor of the fund. It is right to show solidarity now, but the aid should support reforms that strengthen growth and employment.

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