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ECONOMY

Economists slam Merkel’s tax relief plans

A panel of top economists believes Chancellor Angela Merkel's new centre-right government should take back its "gift baskets" of tax relief in light of Germany's huge public debt.

Economists slam Merkel's tax relief plans
Photo: DPA

Merkel “promised us that the government would do everything so that our gloomy forecasts would not happen… They can therefore pack up their beautiful gift baskets,” Wolfgang Franz, head of the so-called “Five Wise Ones” panel, told the latest edition of Der Spiegel magazine.

The influential group of economists has forecast growth of 1.6 percent for 2010, which it says is not enough to replenish the public coffers. Two weeks ago they criticised the lack of “concrete information” from the new centre-right government about their plans to reduce the deficit and deal with expected massive drop in tax revenue.

A tax relief package, already voted on by the German parliament amounting to some €8.5 billion ($12.6 billion), is set to take effect in January.

In the panel’s annual report released earlier this month, the economists issued a sharp attack on the new government saying its plans to reduce the country’s ballooning debt were “vague” and “deceptive.”

Merkel, re-elected in September at the head of a new coalition, failed to recognise the scale of the challenges facing Europe’s biggest economy, it said. In particular the new coalition of conservative Christian Democrats (CDU) and pro-business Free Democrats (FDP) has failed to spell out how it will reduce Germany’s budget deficit and an “exit strategy” for reducing massive stimulus measures propping up the economy, the panel said.

Michel Fuchs, deputy head of the CDU parliamentary group, called the panel’s criticisms “not only presumptuous and false, but also dangerous.”

But Franz stressed the economic panel was an independent body without a political agenda. “We deliberately express ourselves in terms that are clear and not very diplomatic,” Franz told Der Spiegel. “Our mandate is to warn against bad developments, not to sing someone’s praises.”

He said “the government cannot rely only on growth, which will not be enough to generate the €37 billion which we estimate are needed between now and 2016 to consolidate” the public finances.

Data from the national statistics office earlier this month indicated that the German economy made a comeback in the second and third quarters of 2009 from its worst post-war recession, in large part owing to huge injections of cash – some €80 billion – from the state.

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ECONOMY

German consumer prices set to rise steeply amid war in Ukraine

Russia's war in Ukraine is slowing down the economy and accelerating inflation in Germany, the Ifo Institute has claimed.

German consumer prices set to rise steeply amid war in Ukraine

According to the Munich-based economics institute, inflation is expected to rise from 5.1 to 6.1 percent in March. This would be the steepest rise in consumer prices since 1982.

Over the past few months, consumers in Germany have already had to battle with huge hikes in energy costs, fuel prices and increases in the price of other everyday commodities.

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With Russia and Ukraine representing major suppliers of wheat and grain, further price rises in the food market are also expected, putting an additional strain on tight incomes. 

At the same time, the ongoing conflict is set to put a dampener on the country’s annual growth forecasts. 

“We only expect growth of between 2.2 and 3.1 percent this year,” Ifo’s head of economic research Timo Wollmershäuser said on Wednesday. 

Due to the increase in the cost of living, consumers in Germany could lose around €6 billion in purchasing power by the end of March alone.

With public life in Germany returning to normal and manufacturers’ order books filling up, a significant rebound in the economy was expected this year. 

But the war “is dampening the economy through significantly higher commodity prices, sanctions, increasing supply bottlenecks for raw materials and intermediate products as well as increased economic uncertainty”, Wollmershäuser said.

Because of the current uncertainly, the Ifo Institute calculated two separate forecasts for the upcoming year.

In the optimistic scenario, the price of oil falls gradually from the current €101 per barrel to €82 by the end of the year, and the price of natural gas falls in parallel.

In the pessimistic scenario, the oil price rises to €140 per barrel by May and only then falls to €122 by the end of the year.

Energy costs have a particularly strong impact on private consumer spending.

They could rise between 3.7 and 5 percent, depending on the developments in Ukraine, sanctions on Russia and the German government’s ability to source its energy. 

On Wednesday, German media reported that the government was in the process of thrashing out an additional set of measures designed to support consumers with their rising energy costs.

The hotly debated measures are expected to be finalised on Wednesday evening and could include increased subsidies, a mobility allowance, a fuel rebate and a child bonus for families. 

READ ALSO: KEY POINTS: Germany’s proposals for future energy price relief

In one piece of positive news, the number of unemployed people in Germany should fall to below 2.3 million, according to the Ifo Institute.

However, short-time work, known as Kurzarbeit in German, is likely to increase significantly in the pessimistic scenario.

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