Why is Germany subsidizing the cost of electricity for everyone rather than only the poorest households?

Question

According to Reuters:

German Chancellor Olaf Scholz set out a 200 billion euro ($194 billion) "defensive shield", including a gas price brake and a cut in sales tax for the fuel, to protect companies and households from the impact of soaring energy prices.

Europe's biggest economy is trying to cope with surging gas and electricity costs caused largely by a collapse in Russian gas supplies to Europe, which Moscow has blamed on Western sanctions following its invasion of Ukraine in February.

I can understand subsidizing the costs for businesses and for the poorest households but why are middle and upper class consumers being subsidized as well? Have there been any discussions in the German parliament over this question?

Answer 1

If you subsided based on income or other factors that means you need additional overhead in order to determine who is eligible. In addition it does not prevent people who don't need the assistance from getting it as well as there cases you can have lower income but not need the assistance. Not to mention this doesn't account for people with higher income that also can't afford the increase in costs due to how they budgeted things. Just because you make more money doesn't mean you have a larger budget surplus.

On the other hand if you just provide the assistance to everyone you are able to remove the costs associated with determining who needs it and who doesn't.

Answer 2

The policy is probably targeting also people substantially above the median of both income and equity, and on purpose. The subsidies are not only meant to prevent people from freezing or going hungry; they are meant to prevent social unrest. Discontent with the specific government is one thing, and every government naturally tries to keep people on their side; but what I see is growing discontent with the system, and that's considered a major threat to democracy itself. Remember the yellow vest riots in France a couple of years ago? The trigger were high gasoline prices but they evolved quickly into a general protest comprising several different factions, including systemic opposition. Any grievance currently falls on a fertile ground of general discontent and distrust.

Therefore, to prevent social unrest, the subsidies are designed to buffer high energy prices for a majority of the population, including relatively wealthy people.

One such group certainly are home owners who will be particularly hard-hit by skyrocketing energy prices because heating a single home is expensive compared to heating an apartment. Home owners in Germany are relatively more wealthy than their American counterparts because land, labor and building codes all make even simple single homes vastly more expensive than in America, which lifts probably the vast majority of owners over the median. At the same time, house owners are often on a tight overall budget because of the loans they had to take out.

Of course you could shrug and say these are luxury problems; they should simply sell their houses and move into a smaller apartment. Nobody is going to starve, after all. But you would sell into a market slump, and the subjective experience of having to move out of one's own house for reasons outside one's influence (but attributed to the government!) is devastating. You would have an exodus, potentially a collapsing housing market and construction industry, at a time when more housing is direly needed, and a very bad press.

Therefore, the only people for whom the subsidies would not be a stress relief are the fairly rich ones, a minority. That is simply accepted, for simplicity and uniformity of the implementation.

Answer 3

Note that how this subsidy is going to work in detail is not yet decided. What the government did so far is:

• state publicly that they want this to happen
• set aside a budget (up to 200 billion euros) for it and a time frame (it is supposed to last until around April 2024, the end of the next winter)
• proclaim what it is supposed to achieve

What is supposed to happen next is that some suitable expert commission will work out a detailed proposal how to achieve these goals. How to do that is currently actively discussed in the media. As there also should be motivation to save gas/ energy this is tricky to achieve. There are also vastly different opinions on who should benefit from this and by how much.

Answer 4

Overhead costs and spite is the only thing it would give.

The overhead of deciding who is eligible to receive the subsidy is costly. This would be a clear negative.

Lets try to find the positives of just giving it to the poorer households. In other words what financial/economical benefit does it bring? Lets start by seeing where the money comes from. From the state, whom gets it mainly from taxes; but also, albeit in smaller amounts, by printing and devaluating current fiat assets and then some other stuff in even smaller amounts.

Lets look at the biggest piece of the pie, the taxes, and how these taxes are setup. They are set up progressively. Meaning that higher household (medium & high) incomes are paying the higher part of the tax-burden compared to the lower household incomes.

The majority of the amount of money that a lower household income receives through this subsidy is mainly paid by the higher household incomes; Likewise the majority of the money that the the higher household incomes receive through this subsidy are mainly paid by higher household incomes - themselves.

If the state now runs a deficit in their balance sheet, they will have to go where the money is - the higher household incomes and they will tax them some more, the lower household incomes would be left relatively unaffected or at least affected in a much lesser degree.

Isolating this process and looking at the cycle, each time this cycle would happen the poor are getting richer and the rich are getting poorer EVEN if the higher household incomes are not excluded from this subsidy.

To conclude, besides the extra overhead cost of trying to see who is eligible. The fact of being excluded would create a lot of spite, as it feels like another slap for the ones excluded - whom are already contributing more. As now they aren't 'only' paying more taxes, but are also excluded on benefits. It's two tangible negatives over one. Even though they would pay for the bulk of the cost in the long run anyhow and the result would be the same. Two tangible negatives are different feeling than one and creates a bigger negative psychological impact, and as such a bigger negative social impact.

I see you thinking, well the highest incomes avoid taxes. Trust me - this single or select few people don't care getting a few hundred or a few thousand in subsidies. This money is NOTHING to them, nor to the state; compared to the millions of euro the state is missing out on by the many tax loopholes they can use. And even with the loopholes in place, in many cases they still do pay a fair share of absolute taxes; much much more than the average person; much much more than what they will ever get in return from the state or this subsidy, so why make them feel excluded for something so trivial?

One last thing I want to add, what others stated; some medium income and high income households have indeed just no margin left.

Cheers, Andries

Answer 5

Because the government includes the liberal FDP.

The current (2022) German government coalition consists of three parties:

• SPD, a social democrat party on the centre-left. Their platform includes the usual mildly left-wing ideas of European social democratic parties in the 21st century. Their voters come from all classes.
• Greens party, a party with roots in the anti-war and anti-nuclear environmental movements of the 1970s/1980s, today a party favouring moderately strong government intervention to protect the environment, but also moderately on the left on welfare issues. Their voters tend to be higher educated and urbanised; not necessarily rich, but not much working class poor.
• FDP, a small-government liberal party on the centre-right, with a focus on freedom, including lower taxes, liberal drugs, absence of speed limits, and general deregulation. Their voters tend to be relatively rich, with one stereotype being people who drive Porches at 250 km/h on the Autobahn.

For the FDP in particular, this is not their natural government coalition. They would prefer to be in coalition with the CDU (conservative party), but they are not. The differences between the parties show in debates on how to handle the energy crisis.

The notes of government meetings are not public, but I would fancy a guess that the answer to the question is: the payments are reduced for everybody because the FDP is in government. FDP voters are rarely poor, and by reducing the cost for everyone, FDP voters also get something.

Answer 6

In the accompanying press conference, the argument Robert Habeck, minister for economy, delivered was [German source] that the energy crisis was about to become an economic and social crisis as well.

This, together with the general thrust of past programmes and arguments that are hard to pin down in one post, leads us to conclude two goals that would not be served if only the poor were helped:

1. A major goal is to help the economy. The competitional disadvantages that already existed due to the highest energy prices in all of Europe before the Russian invasion of Ukraine even started raised by the factor of 2-4. This threatened to hit the export-driven, energy-intensive industry of Germany very hard and in part already did (see e.g. here). Therefore, a main goal was to intervene so that the rising cost functions of the industry and following bankruptcies do not lead to extreme recession.
2. It is hard to sell general subsidiaries for the economy without adding general subsidiaries for private households if you do not want to risk a social crisis. Especially considering high inflation rates there is a lot of volatile political atmosphere in the more politically active social groups which are definitely not to be found in the lowest income brackets. It is the middle class that goes on demonstrations and it is the upper class that finances political campaigns. Therefore, it makes total sense to include everyone if one wants to throw in tons of money for the economy anyways.

That being said, up to the moment I post this, there is nothing more than an expert committee being installed that is supposed to work out the details and a financial framework. We do not know how it will look like.

Answer 7

One point that hasn't been mentioned so far is that subsidising on the supply side, i.e. subsidising the local/regional energy suppliers when they buy gas (or electricity) is a possibility. That may be done with even lower burocratic overhead than a subsidy that is paid to people or businesses (even if that would not include checking whether they're sufficiently poor) since there are fewer such suppliers than inhabitants or businesses in general.

As others have said, it is not clear yet, which routes will be taken - but the current announcement leaves this possibility open to discussion.

---

Re burocracy of subsidizing only those in need: (which in general is an approach that I'd favor)

Right now, the sharp increase in energy costs puts a whole lot of households into the "needy bracket" that weren't considered in need of financial aid before.

Paying out more subsidies to those who already receive financial aid by the social security system is comparatively easy. But I doubt that social security administration would be able to manage such a sudden inflow of cases. (Plus, the respective burocracy is considered quite daunting to the ones applying for aid)