States mutiny against Merkel’s tax cut bill

The January 2010 tax cuts planned by Chancellor Angela Merkel's new centre-right coalition faced failure on Friday amid growing resistance from Germany's states. Politicians are now discussing the possibility of pushing the changes back to 2011.

States mutiny against Merkel's tax cut bill
Photo: DPA

Merkel’s conservative Christian Democrats (CDU) and their junior coalition partners the pro-business Free Democrats (FDP) want to adopt a fiscal package worth €8.5 billion including tax cuts and benefits aimed at spurring economic growth. Details include increased child benefits, reduced value-added tax (VAT) in hotels and restaurants, and a reform of business inheritance laws and some cuts in corporate taxes.

But officials from Germany’s 16 federal states – even those led by CDU-FDP coalitions – are increasingly dissatisfied with the package. Their balking threatens to torpedo the vote in the upper house of parliament, the Bundesrat, on December 18.

In a meeting with Merkel on Thursday evening there was talk of extending talks into early next year, which would mean the bill could not take effect on January 1 as planned.

Of the €8.5 billion in tax revenue Germany would miss out on due to the bill, the federal government would shoulder €4.63 billion, the states €2.28 billion and municipalities €1.57 billion.

“We don’t want to be forced by the federal government into taking on debt,” head of the CDU in the state of Saxony Steffen Flath told regional daily Sächsische Zeitung.

But North Rhine-Westphalia’s state premier and CDU member Jürgen Rüttgers told broadcaster WDR5 that the financial burden would be manageable.

Municipal authorities have argued that they are already heavily in debt and would not be able to survive additional pressure.

The plan to reduce VAT for hotels – added to the bill under pressure from the state of Bavaria – is particularly unpopular. It would mean a loss of €1 billion in tax revenues.

Meanwhile economists have also expressed doubts over whether the fiscal package will create economic growth.

Bundesbank board member Thilo Sarrazin told financial daily Handelsblatt on Friday that Merkel should lock herself in a room for two days and think over the issue.

“I am missing any toehold with which we are supposed to approach the problems that really threaten our future,” he told the paper.

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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.


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.