Output, prices and public debt under the new German fiscal consensus

Christian Ochsner and Christopher Zuber

No 01/2025, Working Papers from German Council of Economic Experts / Sachverständigenrat zur Begutachtung der gesamtwirtschaftlichen Entwicklung

Abstract: Germany is undergoing a major shift in fiscal policy. In response to recent crises and long-term structural challenges, the federal government has introduced a debt-financed spending package that marks a significant departure from past fiscal orthodoxy. This paper investigates the macroeconomic implications of Germany's new fiscal consensus, focusing on how the composition of spending-investment versus consumption-affects inflation, growth, and debt sustainability. Using structural vector autoregressions, we estimate fiscal multipliers across key expenditure types and apply them in a scenario analysis. We focus on three scenarios in which policy makers focus either on consumption, constrained consumption or investment. Our results show that an investment-oriented strategy, particularly those targeting infrastructure and R&D, yields stronger and more sustained GDP growth with more favorable long-term debt outcomes than consumption-oriented approaches. These findings highlight the importance of fiscal quality over quantity. They suggest that strategic allocation of fiscal resources is essential for achieving long-term economic resilience and fiscal sustainability, offering important lessons for Germany and the broader EU as fiscal rules evolve.

Keywords: fiscal package; debt; output; Germany (search for similar items in EconPapers)
JEL-codes: E22 E60 E62 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:svrwwp:319647

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