TAX REFORM Fight over Budget Surplus

Germany's budget surplus is expected to be even larger than expected, pushing tax cuts higher up the agenda for this year’s general election.
Wolfgang Schäuble is feeling protective of his Budget.

German finance minister Wolfgang Schäuble will receive more good news on Thursday, with the annual publication of the country’s estimated tax receipts. Documents seen by Handelsblatt, suggest his ministry could have an extra €55 billion ($60 billion) to spend between now and 2020. As Germany’s fiscal situation goes from strength to strength, politicians are faced with one of the most comfortable dilemmas of all, on how to spend the money – on tax cuts, on public investment, or on paying down debt.

According to the estimates, annual government revenues will rise from just under €700 in 2016 to €825 billion in 2020. Previous estimates for 2020 were lower: just €806 billion. But strong economic growth, health corporate finances and full employment promise to fill the government’s coffers faster than expected.

The numbers are compiled by a commission of around 30 experts drawn from federal and state governments, and independent economic experts. They will meet for two days this week in the landscaped gardens of Bad Muskau, a world heritage site close to the Polish border, then make their findings known on Thursday morning.

Strong economic growth, health corporate finances and full employment promise to fill the government’s coffers faster than expected.

Mr. Schäuble can allow himself a moment of congratulations over the nation’s extraordinary financial performance. Balanced budgets are the central plank of his economic philosophy and Germany has balanced its budget for the last three years. Nonetheless, the veteran finance minister may have mixed feelings: the news of massive government revenues comes at a tricky time.

At the moment Germany is governed by a grand coalition government between the center-right Christian Democrats, or CDU, and the center-left Social Democrats, or SPD. The SPD wants to see higher public investment and spending on social issues, while the CDU has an increasing number of voices calling for tax reform.

Mr. Schäuble wants to avoid the temptation for the ruling parties to go for giveaway policies ahead of the federal elections. So the finance ministry has consistently suggested there is only around €15 billion leeway for tax reductions, a line that will be harder to keep in the light of these new figures.

“The state is profiting too much from record tax receipts and low interest rates,” Markus Söder, the finance minister of the state of Bavaria, told Handelsblatt. Mr. Söder represents the Christian Social Union, or CSU, the CDU’s Bavarian sister party, which generally outflanks it on the right. He said the CSU wanted to see fairer tax bands and the abolition of the “solidarity surcharge,” a 5.5 percent income tax dating back to the early 1990s, when it was raised to help pay for German unification.

Similar demands were made by Carsten Linnemann, who heads a pro-business grouping within the CDU: “These taxes have been hard-earned by workers and companies. It is time to give one-third of any surplus back to taxpayers.” Mr. Linnemann’s calculations suggest the finance ministry could have an extra €30 billion to play with in the coming years, double what Mr. Schäuble suggested would be available. There have been recent calls for lower taxation from influential institutions. In a report, the Bundesbank, Germany’s central bank, said that “the case for reducing the tax burden is self-evident.” The International Monetary Fund, or IMF, also regards tax cuts as manageable, sources with the organization have told Handelsblatt.

In recent days, Mr. Schäuble’s cautious finance ministry has been planning low-key ways of breaking the news, making clear that there it had less room maneuver than at first glance. At the presentation of the results on Thursday, the finance minister will emphasis the uneven spread of savings across the country.

According to calculations seen by Handelsblatt, most of the increased receipts will benefit state and local authorities rather than the federal government, thanks to existing tax cuts and federal payments to the states for refugee integration. Mr. Schäuble’s ministry will claim he will in fact have just a few extra billion to spend this year, with no decrease next year a possibility. In 2019 and 2020, it claims, the increased funds for central government will be minimal, compared to lavish surpluses for state and local authorities.

In lights of the good economic news, politicians from Mr. Schäuble’s party have been pushing state governments to end their de facto blocking of tax cuts. In recent years, tax reductions have been repeatedly blocked in Germany’s upper house of parliament, the Bundesrat, which is made up of state representatives.

No state finance minister can tell me that they cannot manage at a time of low interest rates and booming tax receipts. Carsten Linnemann, CDU

Although some states are led by Christian Democrats, state governments generally fear that tax cuts will impact their income: in Germany, taxes are raised at the federal level, with federal and state governments each receiving 42.5 percent of receipts, and local administrations getting the remaining 15 percent. The government of the largest state, North Rhine-Westphalia, fears that overall tax cuts amounting to €15 billion would directly cost it €700 million, while local authorities in the state would lose another €300 million.

“No state finance minister can tell me that they cannot manage at a time of low interest rates and booming tax receipts,” said Mr. Linnemann. The country’s sixteen federal states already received an additional €8.8 billion from last year’s federal surplus.

“We need real, honest tax reform. Even states led by the SPD cannot block this any longer,” said Mr. Söder, the Bavarian finance minister.

The Green party has also entered the debate, saying the money should be used not for tax cuts but to support the vulnerable. The party is a ruling coalition partner in no less than eleven of the country’s sixteen states, giving it outsize leverage in blocking legislation in the upper house of parliament.

Anton Hofreiter, leader of the Greens in parliament, told Handelsblatt that “increased public investment is the top priority,” so as to target help at single parents, families and people on low incomes.

So, despite booming public finances, post-election tax cuts are by no means a foregone conclusion.

Martin Greive is a correspondent for Handelsblatt based in Berlin. Jan Hildebrand leads Handelsblatt's financial policy coverage from Berlin and is deputy managing editor of Handelsblatt's Berlin office. Donata Riedel covers economic policy for Handelsblatt. To contact the authors: [email protected], [email protected], [email protected]