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ECONOMY

CDU plans minor tax reform as growth surges

The surprisingly strong economic recovery in Germany has Chancellor Angela Merkel’s conservative Christian Democrats (CDU) planning small tax reforms worth some €500 million, a media report said on Monday.

CDU plans minor tax reform as growth surges
Photo: DPA

CDU parliamentary group leader Volker Kauder told daily Financial Times Deutschland that the party had opened itself to the new measures following last quarter’s record growth figures, when the economy grew by 2.2 percent.

Among reforms would be suggestions recently presented by state finance ministers, he said.

Deputy leader of the CDU’s economic committee Christian von Stetten is working on the plan and told the paper that reforms were necessary.

“Now we must push through the overdue tax simplifications because the money is finally there,” he said.

But he also warned that tax reductions would be small.

“Our proposals for tax simplification will cost the nation, states and communities only about €500 million,” he told the paper.

The reforms will likely be set in motion within just a few months, he added.

The move could be an attempt to head off calls by the Christian Democrats’ junior coalition partner, the pro-business Free Democrats for deeper tax cuts.

Germany’s economy has bounced back from the worldwide financial crisis much sooner than anticipated, and in the second quarter of this year it notched up the fasted growth since reunification in 1990.

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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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