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Economic experts blast tax cut plans

The presidents of Germany's five major economic research institutes have increased pressure on the German government over its controversial tax cut plans. They have called on the chancellor to balance the country's books.

Economic experts blast tax cut plans
Photo: DPA

Chancellor Angela Merkel is coming under increasing pressure from Germany’s main economic research institutes – the DIW, IWH, RWI, ZEW and the HWWI – over her government’s economic policy. In interviews carried out by the news agency DDP on Friday, the institute presidents called on the government to consolidate the country’s budget, rather than steeping it in further debt.

The economic experts also criticised the tax cuts planned for the new year by the ruling centre-right coalition of Christian Democrats and Free Democrats, saying that there was no room for manoeuvre in the current budget.

President of the German Institute of Economic Research (DIW) Klaus Zimmermann warned against running the country “at the expense of future generations.” Christoph M. Schmidt, president of the Rhineland-Westphalian Institute for Economic Research (RWI), called the government’s tax policy “unrealisable.”

“Between 2011 and 2016, the state needs to save €37 billion,” said Wolfgang Franz, president of the Centre for European Economic Research (ZEW). “That is a Herculean task.”

Ulrich Blum, president of the Institute for Economic Research in Halle (IWH), had special criticism for the planned reduction of sales tax in hotels from 19 percent to 7 percent. He called this a “sin” and a “nightmare.”

The economic experts pointed to the dangers to the economy posed by the ageing population, which is likely to put a huge strain on the welfare state and state finances in the next ten years. At the end of the decade “the demographic time-bomb will really go off,” said Blum.

Thomas Straubhaar of the Hamburg Institute of International Economics (HWWI) advised the government to follow a different tax policy. He suggested that today’s precarious economic situation did not call for individual tax cuts, but a wholesale tax reform. While cutting direct taxes like income tax was valid, indirect taxes like sales tax needed to be raised to balance this out, he said.

Zimmermann called for a sales tax rate of 25 percent. This might be unpopular, he admitted, “But in the face of a record state debt of €1.6 trillion, a sales tax increase is only a matter of time.”

Schmidt agreed that sales tax may have to be raised sooner or later. “It would be poison for economic growth, but would be politically easier to realise than reducing state subsidies,” he said.

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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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