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BUDGET

Merkel’s cabinet backs budget and tax cuts

Chancellor Angela Merkel’s cabinet on Wednesday signed off on budgetary plans that would see Germany’s deficit drop to €27.2 billion next year and cut taxes and social security contributions in 2013.

Merkel’s cabinet backs budget and tax cuts
Photo: DPA

The proposed 2012 budget expects the government’s borrowing needs to drop €4 billion compared to previous projections, due to the booming economy boosting tax revenues. The annual budget deficit is forecast to shrink to €14.7 billion by 2015.

But Berlin’s budgetary consolidation will be slowed by the establishment of the EU’s permanent eurozone rescue fund, which will burden Germany with €4.3 billion starting in 2013.

The cabinet also backed the centre-right coalition’s intention to cut taxes and lower social security contributions starting that same year. Although the cuts are meant to target taxpayers in lower and middle brackets, final details will only be firmed up after parliament’s summer recess.

“Budgetary consolidation and lowering the tax burden are two sides of the same coin,” said Economy Minister Philipp Rösler after the cabinet meeting. “That’s how we create the foundation for a sustainable upswing.”

Rösler’s pro-business Free Democratic Party (FDP) is known for its tax-cutting zeal and many observers believe Chancellor Merkel agreed to the fiscal plans in a bid to boost the fortunes of her junior coalition partners ahead of a general election in autumn 2013.

But not all of Merkel’s conservatives are pleased by the proposed cuts.

The budgetary spokesman for her Christian Democrats (CDU) in parliament, Norbert Barthle, said on Wednesday there was “currently no wiggle room” for new expenditures or decreased revenues.

And Finance Minister Wolfgang Schäuble’s budgetary planning at present does not account for potential gaps in funding.

The CDU’s Schäuble recently irked the FDP by suggesting they come up with spending cuts to cover the cost of any lowering of taxes.

DAPD/The Local/mry

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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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