Investment, investment. It is this slogan that dominates economic policy discussions amidst ongoing weak growth. In fact, investment in Germany has grown at an alarming rate in recent years. Gross fixed capital formation has been shrinking since its peak in the summer of 2019. From 2023, the downward trend accelerates again. This does not bode well for medium-term growth prospects. A country that has no investment or increasingly little investment does not have a bright future.
The decreasing willingness to invest is an important reason why the overall economic performance has shrunk in recent years and experienced stagnation. One actor in economic activity is not affected by this: the public sector. The country’s consumption continues to increase, it can fluctuate, and the red-green-yellow traffic light coalition is increasing it even more. Looking at the last ten years, there is a huge gap when comparing demand components.
After peaking in 2019, gross fixed capital formation fell to the point that in spring this year it was only five percent higher than in 2015. Despite years of stagnation, gross domestic product still achieved an increase of 8.5 percent in a ten-year comparison. But government consumption grew more than 25 percent in the last decade, adjusted for inflation. The politically driven increase in the number of civil servants in the traffic light coalition years contributed to this.
Private consumers have experienced a very different fate in the last decade. In the crisis years following the Covid pandemic, private consumption has almost stagnated. When compared ten years, there is only an increase of around ten percent due to stable growth in the years before the Covid pandemic. An overall increase of ten percent pales in comparison to government consumption, which has more than doubled. The public sector has taken an increasingly large share in the output growth of a small economy. A higher tax burden reduces the scope for private household consumption.
Now, with the government of Friedrich Merz (CDU), more investment is intended to stimulate the economy and also provide more space for private consumers. In public debate, this idea is often linked to suggestions about how the state could further improve its finances, through taxes on the rich or the machines, or through more debt. Anyone discussing this assumes that government investment is the benchmark for everything to get the German economy back on track.
A simple comparison of measures suggests that the government and the Bundestag would be better off starting elsewhere. Compared with private sector investment, the size of government investment is very small. Even in the construction sector, the state plays the role of custodian of infrastructure. Last year, private individuals invested 373 billion euros in buildings, while the state spent only 78 billion euros. Individuals are even more dominant in the area of critical equipment investment. The obvious size ratio suggests only one conclusion: If you really want to encourage supply-led growth in Germany, it would be better if private companies and households invested more easily in machines, factories, or living space rather than giving more money to the public sector.
This is especially true as ten-year investment comparisons show developments that contradict the often painted picture of a country underfunded and lacking money to invest. The public sector has increased its investment significantly over the past ten years, while the reluctance of private investors continues to increase.
Example of equipment investment: The state has increased its investment by 40 percent or more since 2015, while private equipment investment is back to levels ten years ago. Construction example: The state has increased its construction investment by more than 30 percent since 2015, while private investment has decreased by ten percent compared to ten years ago. If the public sector has invested too little in road and rail infrastructure in recent years, this is clearly not because it has too few funds. The Bundestag and the federal government may not be spending the money in the right places.
This trend continues. The Advisory Council for the Assessment of Overall Economic Development and other economic institutions have calculated that of the billions in new debt for additional investment in infrastructure, only about half is actually used for this purpose. The rest is for government consumption or planned investment. If the black-red coalition does not apply the emergency brake, the gap between increasing government consumption and decreasing economic output is likely to widen further.
