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Germany pledges inflation relief tax package worth €10 billion

Finance Minister Christian Lindner officially presented plans on Wednesday to offer tax relief worth €10 billion to help families in Germany cope with soaring inflation.

Finance Minister Christian Lindner speaks at a press conference in Berlin.
Finance Minister Christian Lindner speaks at a press conference in Berlin. Photo: picture alliance/dpa | Kay Nietfeld

As reported on Tuesday by The Local, the package will raise base tax-free allowance as well as bring up the level from which the top income tax rate of 42 percent will apply.

Families will also benefit from higher tax exemptions for dependent children.

“We are in a situation where action has to be taken,” Lindner, of the pro-business Free Democrats (FDP), said during a press conference in Berlin where he officially unveiled the proposals.

Inflation in Germany reached 7.5 percent in July, fractionally lower than the 7.6 percent recorded in June, fuelled mainly by soaring energy prices.

Lindner said his plan is aimed primarily at fighting the problem of employees who find themselves with a higher tax burden because they have received a pay increase to combat inflation.

READ ALSO: How Germany’s Finance Minister wants to ease inflation 

As a result, the gain the workers have received is wiped out essentially by the higher taxes due.

The phenomenon, called “cold progression”, also typically hits lower incomes harder.

Lindner said 48 million Germans would be facing higher taxes from January 2023 if no relief was offered.

“For the state to benefit at a time when daily life is becoming more expensive… that is not fair and also dangerous for economic development,” said Lindner.

The average tax relief would be around €192, Lindner said. However, the plan is controversial in the coalition. The SPD and the Greens are instead calling for targeted relief for low-income earners. 

Lindner said the government would follow up with more relief packages for rising energy costs, with plans to increase housing allowance and benefits.

What are the planned changes?

Under the current proposals, 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.

But 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.

Lindner emphasised that the relief is aimed at people with an income up to just over €60,000. Above that, there would be no further relief, he said. “This concerns the broad middle of society,” he insisted. 

Lindner said on Wednesday that numbers could be adjusted depending on the inflation rate for this year. 

The Finance Minister’s plans also envisage an increase in child benefits.

The proposals still have to be approved so there may be changes down the line.

Double whammy

The tax relief measures come on top of a €30 billion package unleashed by Chancellor Olaf Scholz earlier this year to help consumers beat inflation.

The earlier package included a fuel tax cut and a public transport ticket valid across Germany priced at just €9 a month for June, July and August.

But it is clear that the clouds hanging over Europe’s biggest economy are only darkening as the country heads into the colder months.

READ ALSO: ‘€10-€15 more for groceries’: How price hikes are hitting consumers in Germany

The Ukraine conflict has derailed Germany’s hopes of finally shaking off the coronavirus pandemic and roaring back to growth.

With its export-oriented industries, Germany has been particularly vulnerable to the supply chain bottlenecks and raw material shortages caused by the pandemic.

But now, Germans are also staring down the barrel of doubling energy bills, after Russia drastically curtailed its supply following its invasion of
Ukraine.

The power crunch is not only nibbling away at consumers’ purchasing power but also hurting German industry, much of which relies on cheap energy supplies to manufacture exports.

Employees in Europe’s biggest economy are therefore facing the double whammy of higher costs and a growing threat of job losses as major companies mull idling some factories because it may no longer be cost effective to keep production lines running.

German growth stagnated in the second quarter of the year, but analysts have warned that a recession in the second half will be inevitable.

At their last forecast in March, the German government’s economic advisers estimated that gross domestic product will expand by 1.8 percent for 2022.

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MONEY

Are the EC Card’s days numbered in Germany?

Maestro-function EC cards will no longer be issued as of July 2023. That may leave many people with German cards without the option to use the ubiquitous “EC Karte” abroad. Here's what you need to know.

Are the EC Card’s days numbered in Germany?

In a country that often lags behind much of the rest of the world digitally, cash is still king in many places. From restaurants to bars, cafes, and some smaller shops – options to pay by card are often limited. If a place does take card, it’s often the debit EC card, rather than a credit card or plastic from abroad.

That could soon see a shakeup.

Around 100 million EC cards are currently in use in Germany – more than the number of residents. These cards use two payment services: the Maestro service, which Mastercard provides, and the Girocard service which is independent. Maestro allows the holder to pay with an EC card when abroad, whether at a beach bar in Spain or a museum in Italy.

At home in Germany, Girocard processes EC card transactions.

But the EC card’s popularity here doesn’t translate elsewhere. German cards account for about half of all worldwide Maestro transactions, with the remaining half split absolutely everywhere else in tiny amounts. As such, it’s become difficult and expensive for Mastercard to maintain the old Maestro system that so many people in Germany love to use.

As of 2023, Mastercard will no longer issue Maestro cards, although people can still use ones issued before then until they expire. Without an alternative, that would leave some German debit card holders unable to pay using their new cards abroad.

Rumour has it that a similar Visa service – Vpay – is also on the way out soon.

That could see many cardholders ditch their old EC cards for Mastercard and Visa’s debit services — but around 250,000 businesses in Germany still only take payments made through the Girocard service — which isn’t a part of Visa or Mastercard. A big reason is that retailers pay lower fees to use Girocard.

What are the alternatives to EC Cards?

Where might that leave cardholders in Germany? It might put more pressure on retailers to accept services other than Girocard, which could incur fees that retailers will simply pass on to buyers.

It might leave some people carrying multiple cards, with a debit card they would only ever be able to use at home and not abroad. Or, it might mean carrying more cash just in case people come into an establishment that only takes cash and Girocard.

Some German banks have already moved ahead to offer customers integrated cards.

DKB, an popular online bank in Germany, sees Girocard as an outdated model that can’t be developed much further—and one that’s hard to use for online shopping. Since January, it has only issued customers with a Visa Debit card, but has left them the option to also have a Girocard. This will no longer be free though, costing customers an extra €1 a month.

A customer pays with EC card in a local shop

A customer pays with EC card in a local shop. Many businesses still only take EC card or cash payment in Germany. Photo: picture alliance/dpa | Rolf Vennenbernd

READ ALSO: Why Germans are finally choosing cards over cash

Other banks, like ING, use a ‘co-badge’ system that pays for both the licenses to Girocard and either Visa or Mastercard. However, that leaves cardholders paying a higher fee.

Professor Jürgen Moormann of the Frankfurt School of Finance and Management told Frankfurter Allgemeine Zeitung (FAZ) that MasterCard and Visa are probably discontinuing the Maestro and Visa services for EC cards abroad to put more pressure on Girocard within Germany.

This makes it more likely that retailers will start offering more card-based payment options, such as credit and debit card, to keep things simple for customers.

“They clearly want to increase their market share in Germany,” Moormann says of Visa and Mastercard.

While it’s still too early to tell whether the EC card will be squeezed out, regular cardholders may be left carrying more than one card — or paying higher fees for integrated cards — for a while yet.

In Germany at least, the EC card will be around for some time to come — but its days may well be numbered.

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