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BUDGET

Where the axe has fallen: a budget cut breakdown

As the dust settles on the German government's plans for a round of brutal belt-tightening, The Local breaks down the numbers and the details to see how it affects you.

Where the axe has fallen: a budget cut breakdown
Photo: DPA

After an intensive, two-day cabinet session, the coalition government of Chancellor Angela Merkel’s centre-right coalition has decided to slash €80 billion from the budget by 2014, including €11.2 billion next year.

The axe will fall hardest on welfare, with savings adding up to more than €30 billion over four years.

Parental benefits

While the maximum monthly payment for new parents known as Elterngeld will remain at €1,800, there will be a modest cut to the rate for people on net incomes of more than €1,240 a month, from 67 percent to 65 percent. The targeted saving is €200 million a year.

The present €300 per month Elterngeld for recipients of unemployment benefits will be scrapped completely. That aims to save €400 million per year.

Unemployment

People shifting from regular unemployment insurance to long-term jobless benefits now get an extra payment of up to €160 a month for singles or €320 for married recipients for the first year and half these amounts for the second year. These bonuses will be abolished, saving €200 million a year.

The biggest saving will come from giving the Federal Employment Agency more discretion, allowing it to make decisions about unemployment support and re-integration programmes. This aims to make the management of the long-term unemployed more efficient. Savings are estimated at €4.3 billion in the first year, rising to €10.2 billion in 2014.

For recipients of long-term unemployment benefits, or Arbeitslosengeld II, the government will slash the rates of pension insurance, saving €1.8 billion a year.

The heating allowance for recipients of government accommodation benefits will also be slashed, saving €100 million a year.

Air travel tax

The “ecological air traffic tax” would be imposed on all passengers departing from German airports, and would be levied on criteria such as price, noise and consumption. It could be introduced by including air transport in agreed carbon emissions trading standards and would aim to raise €1 billion a year from 2013.

Armed forces

The structure of the German military will be scrutinised with the aim of saving €2 billion a year from 2013. A special commission set up by Defence Minister Karl-Theodor zu Guttenberg will look at how to cut military staff by 40,000 to about 210,000.

Nuclear energy tax

Energy firms will pay a new tax on profits derived from the extension to the lifespan of nuclear power plants, raising €2.3 billion a year between 2011 and 2014.

Deutsche Bahn

The German rail operator will pay a new dividend on its profits, which the government hopes will deliver €500 million a year.

Financial services tax

A tax on financial transactions would be introduced from 2012, involving an agreement with European and international partners, and would raise €2 billion a year. Merkel said the chances that neighbours would agree to a European-wide levy were “not bad.”

Public sector

About 15,000 jobs will be cut from the public sector by 2014. The rest of the bureaucracy faces an effective 2.5 percent pay cut, with the abandonment of the planned raise in the Christmas bonus in 2011, saving €800 million a year. Overall, cuts to the public service will save €13.4 billion over the four years.

Environmental tax

Exemptions from the environmental tax would be slashed, notably for energy-intensive industries. This would raise €1 billion next year.

Research and development

The government’s previously announced plan to boost spending on research and development by €12 billion by 2013 remains in place.

Berlin City Palace

The reconstruction of Berlin’s historic city palace will be put on hold at least until 2014, saving the federal government €440 million. The plan will be revived when the money is available.

Sources: Federal Government, Financial Times Deutschland

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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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