Covid-19 Support Measures Proving Effective, Despite Distorted Incentives
ResearchZEW Report Takes Stock of Economic Support Measures and Sets Out Lessons for Future Crises
The federal government’s Covid-19 economic relief packages effectively stabilised businesses and jobs. According to estimates, around 140,000 businesses were saved from closure, and some 280,000 jobs were safeguarded in 2020 and 2021. Negative impacts on structural change remained limited. This is the conclusion reached by Professor Friedrich Heinemann, head of ZEW’s Research Unit “Corporate Taxation and Public Finance”, in a statement for the German Bundestag’s Study Commission Analysing the Covid-19 Pandemic and Lessons for Future Pandemic Events. Nevertheless, the ZEW economist recommends providing more targeted support in future crisis situations, combined with a revised short-time work compensation scheme and the abolition of tax breaks for specific sectors.
“The overall assessment of Germany’s COVID-19 economic relief packages is favourable. The government made swift and decisive use of its financial leeway, thereby helping many fundamentally viable companies through an extraordinary crisis,” says Heinemann. “However, in the event of future crises, we must take even greater care to ensure that state aid does not turn into a permanent obstacle to structural change. The aim of crisis policymaking is to quickly achieve stability, but as the crisis drags on, there should be stronger incentives for companies to adapt.”
Around 140,000 businesses saved from closure
The COVID-19 support measures helped to improve the liquidity and credit standing of the businesses receiving aid and prevented many business closures. An evaluation study by Prognos and ZEW, which used simulations based on the Mannheim Enterprise Panel, shows that without the measures adopted by the government there would have been around 100,000 additional closures in 2020. A further 46,000 avoided closures were recorded for 2021. Taking knock-on effects into account, this results in a net effect of around 136,000 businesses saved and some 283,000 jobs secured. At the same time, a calculated insolvency gap of around 8,600 businesses suggests that the support measures also temporarily kept economically vulnerable micro-enterprises in the market. However, according to the statement, this effect was minor in comparison to the stabilising effect and largely temporary. Heinemann also gives a positive assessment of the German loan programmes. Strict eligibility criteria, the ban on refinancing old debt and checks for overcompensation limit false incentives.
Reform of short-time working and avoiding tax privileges recommended
Heinemann sees room for improvement in short-time work compensation. He explains that, unlike other European countries, Germany largely lacks mechanisms to encourage a transition to sustainable employment in the event of prolonged short-time working. Instead, wage replacement rates that increase over time have created incentives to remain on short-time working for longer. He recommends falling replacement rates in future crises as well as greater cost-sharing and additional requirements for companies in the event of prolonged use of short-time working schemes.
In light of the negative experiences with hastily launched support schemes during this year’s recent oil price surge, he also recommends caution when introducing new crisis programmes. Policymakers should agree on thresholds for a decline in GDP and only launch specific crisis programmes when these thresholds are exceeded and a genuinely severe crisis is evident.
Heinemann also cites the – initially temporary – reduction in VAT on food served in the hospitality sector as an example of a particularly poorly designed crisis relief. This measure eventually became a permanent tax subsidy in 2026, resulting in annual tax revenue shortfalls of close to four billion euros. “Sector-specific tax concessions can very quickly take on a political life of their own. The catering sector’s VAT rate is a case in point of how a temporary crisis relief package can turn into a costly permanent subsidy,” says Heinemann.
