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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

Germany reaches agreement on Bürgergeld – with a couple of catches

Members of Germany’s traffic light coalition government and the opposition Christian Democratic Union party have reached an agreement in the dispute over plans for a new citizens‘ income. There will be tougher sanctions against benefit recipients and fewer discretionary assets.

Germany reaches agreement on Bürgergeld - with a couple of catches

Last week, the German government’s plans to reform unemployment benefits with its new “Bürgergeld”, or citizens’ income, proposals were blocked in the Bundesrat.

The legislation was held up mostly by members of the Christian Democratic Union (CDU/CSU) which had been strongly opposed to the proposals for a six-month Vertrauenszeit (trust period) in which benefits claimants would not incur sanctions, as well as to the amount of assets recipients would be able to hold on to.

READ ALSO: EXPLAINED: Will Germany’s controversial Bürgergeld still come into force?

On Tuesday, politicians from the traffic light coalition parties and the CDU/CSU reached a compromise on the proposed reforms which means that some of the key measures will be scrapped.

No trust period

The CDU/CSU was able to push through its demand for more sanctions for recipients and the six-month trust period will now be scrapped completely.

Instead, it will be possible to enforce benefit sanctions from the first day of an unemployment benefits claim if recipients don’t apply for a job, or fail to turn up for appointments at the job centre, for example.

The CDU and CSU also demanded that unemployment benefits recipients be allowed to keep less of their own assets when they receive state benefits. The original plan had been for assets worth up to €60,000 to be protected for the first two years, but the compromise reached has knocked this down to €40,000 for one year – during which time benefits recipients will not have to use up their savings.

Following the announcement of the agreement, Green Party later Britta Haßelmann said “I regret it very much”. According to Haßelmann, the trust period was the core of the reform designed to stop people from having to take up “just any job”.

READ ALSO: Bürgergeld: What to know about Germany’s unemployment benefits shake-up

Other traffic light colleagues were more optimistic, however. Katja Mast from the SDP spoke of a “workable compromise in the spirit of the matter,” while FDP Parliamentary Secretary Johannes Vogel said that it had succeeded in “making a good law even better”.

CDU/CSU leader Friedrich Merz, meanwhile, sees the compromise as a great success for his party, though he also praised the willingness of the parties in the government to reach an agreement.

“The coalition was very quick and – to my surprise – very largely willing to make compromises here,” Merz said. 

What happens next?

Tomorrow, the Mediation Committee of the Bundestag and Bundesrat will meet to discuss the proposals. If the agreement is confirmed, the welfare reform could clear the final hurdle when it is voted on Bundesrat again at the end of the week. According to the federal government’s plans, if it’s approved, Bürgergeld will come into force in January and replace the current Hartz IV system. 

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