How Germany’s Finance Minister wants to ease inflation with tax relief measures

Germany's Finance Ministry is planning to relieve taxpayers by billions next year to ease the burden of high inflation, according to media reports.

Christian Lindner (FDP), Federal Minister of Finance, speaks at a press conference on current political issues.
Christian Lindner (FDP), Federal Minister of Finance, speaks at a press conference on current political issues. Photo: picture alliance/dpa/dpa-Pool | Michael Kappeler

Federal Finance Minister and FDP leader Christian Lindner is planning to relieve taxpayers by €10.1 billion next year. The Finance Minister has repeatedly promised that the “state must not get rich off inflation” and that the increase in income tax revenues must be given back to the people.

According to a report by Spiegel, he plans to increase child benefits and the basic tax-free amount, above which income must be taxed. Lindner plans to present the proposals this week.

Increase in basic tax-free allowance

The Finance Minister plans to adjust the basic tax-free allowance and tax rate to the rate of inflation. This means that in future, each tax rate will only apply when income is adjusted upward by the inflation rate. Lindner’s tax experts are assuming an inflation rate of just under six percent this year, and price increases of 2.5 percent for next year.

READ ALSO: German inflation slows but energy price pressure remains

Accordingly, the basic tax-free allowance will rise from the current €10,348 to €10,633 next year and to €10,933 in 2024. The top tax rate, which currently starts at a taxable income of €58,597, will only apply at a level of €61,972 in 2023, and €63,521 one year later.

However, the tax threshold for very high incomes will remain in place. The income limit of €277,826, on which the so-called wealth tax rate of 45 percent is charged, will not be changed.

More child benefits

The Finance Minister’s plans also include an increase in child benefits. Child benefits for the first two children will increase by €8 to €227 per month in 2023. For the third child, parents will receive €2 more, also €227. For the fourth child, the monthly benefit will remain at €250. In 2024, child benefits for the first three children will rise by another €6 per month.

The Finance Minister’s proposals are by no means set in stone and are likely to change over the course of the next few months. For one thing, the assumed inflation rates are likely set far too low: experts are currently assuming that the rate of price increases will be around eight percent this year and will probably not fall to 2.5 percent next year.

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German consumer mood slumps further as inflation bites

German consumer confidence remains on a record downward slide as Europe's largest economy faces soaring inflation and an energy crisis heading into winter, a key survey published Wednesday showed.

German consumer mood slumps further as inflation bites

Pollster GfK’s forward-looking barometer fell to minus 42.5 points for October, hitting a record low for the fourth month in a row, following a revised September reading of minus 36.8 points.

“The currently very high inflation rates of almost eight percent are leading to large real income losses among consumers and thus to a significant reduction in purchasing power,” said GfK consumer expert Rolf Buerkl.

“Many households are currently being forced to spend significantly more on energy,” he added.

The leaders of Germany’s 16 states will meet on Wednesday to discuss additional relief measures to help tackle the energy crisis – but without Chancellor Olaf Scholz, who tested positive for Covid-19 earlier this week.

READ ALSO: German state leaders call for more support to help people with rising energy bills 

Inflation in Germany reached 7.9 percent in August, driven by soaring energy costs, with the pace expected to increase further by the end of the

“Consumer morale will only recover noticeably and sustainably if inflation is reduced,” GfK said.

The dismal prediction for October was driven by a record low in income expectations for September.

Germany is expected to go into recession next year, according to the OECD, with Europe’s biggest economy shrinking by 0.7 percent.

Germany has seen a drastic reduction in supplies of Russian gas since the invasion of Ukraine, causing an explosion in prices for the fuel.