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Germany mulls tax cuts as growth falters

22 October 2012   (0 Comments)
Posted by: SAIT Technical
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By Business Day (Financial Times)

Executive summary (SAIT Technical)

Germany is considering tax cuts including an increase in the tax-free threshold and a reduction in the effect of 'fiscal drag' in raising income tax revenues. The government has been trying to push minor tax reforms but is being blocked by the opposition.

Full article

BERLIN — Germany has cut its forecast for growth next year to 1% due to the eurozone sovereign debt crisis and the global slowdown as it made the case for stimulating Europe’s largest economy with tax cuts.

In its traditional autumn forecast, the government revised its prediction for gross domestic product growth next year down from an earlier spring forecast of 1.6%, but slightly raised its forecast for this year to 0.8% from 0.7%.

The government forecasts match those made by the country’s top four economic institutes last week.

"Despite the evident slowdown, there can be no talk of a collapse in growth,” Economic Minister Philipp Rösler said on Wednesday.

"We also have to do our homework and remove constraints to growth. Excessive tax burdens due to (tax) bracket creep need to be removed.” The government has been trying to push minor tax reforms through the Bundesrat, the upper house that represents federal states, since May but has come up against opposition from Social Democrats and Greens.

Chancellor Angela Merkel has spelt out the need for more stimulation of the German economy in order to boost wider growth in the eurozone but stressed that it must not come at the expense of progress towards a balanced budget by 2016.

Speaking to business leaders on Tuesday, Ms Merkel made it clear that possible tax cuts had already been agreed upon by the government but were still blocked by the opposition.

They include an increase in the tax-free threshold and a reduction in the effect of "fiscal drag” in raising income tax revenues. The two proposals would reduce tax contributions by about€6.1bn in 2013, out of a draft budget of€302.2bn.

Ms Merkel said her government had also agreed in August to cut pension contributions from 19.6% to 19%, in a move that would reduce the burden on taxpayers by a further €5.4bn and provide a more immediate stimulus to consumer spending.

The German government’s projections for this year and next showed stable employment and inflation at 2 % this year and 1.9% next year — both figures being within the range targeted by the European Central Bank for the eurozone as a whole.

Real wages are also set to outpace inflation, increasing the spending power of German consumers.


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