federal budget Government surplus could lead to tax cuts

Politicians discussing the country's next government have won billions in wiggle room for tax cuts and increased spending. But German tax cuts will be tiny by American standards.
Quelle: dpa
Walking toward lower taxes.
(Source: dpa)

Germany generated its fourth-consecutive budget surplus last year thanks to a bubbling economy and legal restrictions on government spending, giving an incoming government as much as €45 billion ($53.8 billion) to play with during its upcoming four-year term. Politicians now are discussing ways to return the cash to taxpayers, though Germans shouldn’t be dreaming of a Trump-style tax trim.

The country had a budget surplus of €3.7 billion in 2017, according to calculations by the finance ministry seen by Handelsblatt. The figure doesn’t include an additional €6.7 billion in untapped reserves set aside for refugees in 2017, leaving Berlin with an unexpected €10.4 billion windfall from the 2017 budget.

The surplus comes as the center-left Social Democrats (SPD) are locked in exploratory coalition talks with Chancellor Angela Merkel’s conservatives. Both parties want to provide relief for middle- and low-income households and agree on raising the annual income at which the 42 percent top rate of tax is levied to €60,000 from the current €54,000. The conservatives also want to increase the child benefit and raise the tax allowance for children while the SPD hopes to provide all families with free access to kindergartens.

10 p06 German Federal Budget-01

They also agree that the so-called solidarity tax, a 5.5 percent surcharge that helped rebuild the once-Communist east, should be scrapped, but they’re at odds over how fast it be phased out. At present, it generates some €20 billion in federal revenue per year so it’s likely to be reduced step-by-step rather to avoid decimating government coffers.

Regardless, any tax cuts would pale compared to the US tax overhaul passed by Congress in December, the country’s biggest since 1986. The revamp, due to come into force for 2018, slashes the corporate income tax rate to 21 percent from 35 percent and exempts US corporations from taxes on most of their future foreign profits.

That kind of debt-financed stimulus would be illegal in Germany, which amended its constitution in 2009 to enshrine a so-called debt brake or balanced budget provision which sets a tight limit on structural deficits and only permits exceptions in natural disasters or severe recessions. And even if it were legally possible, it would be political suicide in Germany, which has embraced fiscal consolidation as a state doctrine and preached it mantra-like to debt-ridden southern EU nations during the euro crisis. In addition, Ms. Merkel is too shrewd to copy tax cuts that independent analysts have projected will disproportionately benefit corporations and the rich.

The CDU is concerned about the discouraging effect a tax hike could have on well-heeled entrepreneurs.

Still, not all of Germany’s surplus will go towards tax cuts. The conservatives want to hike defense spending while the SPD has pledged to stabilize pension payouts and spend more on education. The €45 billion won’t be enough to cover tax cuts and the spending hikes. And there’s no way Germany will abandon its balanced budget strategy. Here’s where a potential sticking point emerged in the exploratory talks that the parties plan to wrap up on Thursday before deciding whether to enter into full-blown negotiations.

The SPD wants to recoup part of the planned tax cuts by increasing the highest rate of tax from 45 percent to 48 percent. The conservatives disagree and want all taxpayers, including the rich ones, to benefit, arguing that they’re the ones who pay most tax. While Ms. Merkel’s Bavarian allies in the Christian Social Union party are strictly opposed to any tax increases, some negotiators in her Christian Democratic Union can see scope for compromise. However, the CDU is concerned about the discouraging effect a tax hike could have on well-heeled entrepreneurs, especially at time of budget surpluses running into the billions of euros.

Martin Greive is a correspondent for Handelsblatt based in Berlin and Jan Hildebrand leads Handelsblatt’s financial policy coverage from Berlin. To contact the authors: [email protected] and [email protected]