Output, Prices and Public Debt under the New German Fiscal Consensus

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.