The German economy is still in the process of recovering from the serious effects of the mid 2009 post-war recession. The German administration has been implementing expansionary monetary and fiscal policies to obtain a sustainable growth in the economy. Other measures to achieve this end have been directed towards stabilization of the money market, curbing inflation, harmonizing with the global economic growth and stimulation of aggregate demand and supply through stimulation of investments and consumption. Under the German Economic Growth Acceleration Act, the third stimulus package has been designed to stimulate economic growth through effects of tax cuts, which raise the aggregate demand and supply. This economic stimulus package has increased the opportunities for companies to enjoy tax relief. The stimulus package encourages tax cuts to enable the companies, most of which are small and medium enterprises, acquire financial stability necessary for surviving the crisis and increase their profits. This paper will discuss how the stimulus package will promote economic growth by stimulating the aggregate demand and supply in the German economy (Invest in Germany, 2010)
When qualified companies benefit from tax reliefs, implementation of tax losses and carryforwards, the total production cost significantly reduces. The working capital for the firms increases significantly enhancing flexibility to changes in the market demand. Besides reducing the cost of operation, the tax cut also reduces the tax burden shifted to the consumers hence lowering the consumer prices. The reduction of commodity prices brought about by the tax cut will stimulate an increase in the demand for industrial products. The increasing demand will yield better profits to the producers attracting more companies into the market. This can be explained using the figure below. The tax cut will reduce the commodity prices resulting to a forward shift of the demand curve from D1 to D2. The increase demand will prompt more firms to join the market shifting the supply curve from S1 to S2. For this shift in the supply to take effect, more investments will have to be done providing more employment opportunities to the people. When more people are employed, their purchasing ability is also increased and this leads to an increase in aggregate demand (D2). This ripple effect will establish a sustainable demand increasing investments and eventually aggregate supply (S2) in the economy.
The reduction in the income tax will also increase the disposable income in the hands of the households. Since the propensity to consume is normally higher than the propensity to save, a larger proportion of the increased income will be used to increase consumption and this will raise the aggregate demand from D1 toD2. The two major shifts of the demand and supply curve in respect to the increasing aggregate demand and supply will result in the achievement of the economic growth. The favorable investment conditions brought about by the stimulus package facilitate the easy entrance of more firms into the market leading to the increase in aggregate supply. The conditions for transferring shares also promote merging of companies making it possible to enjoy the economies of scale in production and which results into low operating cost and commodity prices. By implementing these measures, the government stimulates both aggregate demand and aggregate supply promoting the growth of the economy. This stimulus package increases and sustains aggregate demand and supply leading to the improvement of the welfare of both employers and the employees (Invest in Germany, 2010).
Invest in Germany. “Economic Growth Acceleration Act: Germany’s Third Stimulus Package Provides Tax Relief.” PressReleasePoint. 28 January 2010. Print.