Determined to halt the very high inflation that is eroding Germans’ purchasing power, Finance Minister Christian Lindner announced on Wednesday that Berlin would adopt a series of €10 billion in fiscal measures up to 2023 to mitigate price increases. Inflation reached 7.5% over a year in July, lower than in June, but is still at very high levels due to the war in Ukraine.
Adjustment of the tax rate
In detail, Lindner is planning an increase in family allowances, but also an adjustment to the income tax table, in this case by raising the level above which the maximum rate of 42% income tax applies.
Stressing that the government is “forced to act” in the face of rising prices, especially energy prices, the minister specified that some of these measures should also serve to compensate for the “multiplier effect” or “cold progression”. This mechanism penalizes all those who have benefited from a salary increase precisely to offset inflation and who have to pay additional taxes, reducing or negating the desired purchasing power improvement effect.
And this is not a niche phenomenon: If nothing is done, around 48 million people would suffer a tax increase from January 2023 because of this phenomenon, Lindner said.
Now is not the time for tax increases
For the minister in Olaf Scholz’s coalition government, who is concerned about the increase in his fellow citizens’ daily lives, in particular due to “the increase in gas, energy and food prices”, it is not the time to increase taxes :
“For the state to benefit (from an increase in tax revenues) at a time when daily life has become more expensive (…) is not fair and is also dangerous for the economy,” he said at a press conference.
“Our country’s economic outlook has also become more fragile and economic growth forecasts need to be revised downwards,” he added.
Previous measures have not yet shown their effect
The government has already adopted measures totaling €30 billion to bolster purchasing power, including temporary measures to reduce household energy bills such as a “discount at the pump” and a “€9 ticket per month” valid in all public Transportation except High Speed Lines until the end of August.
However, due to the energy crisis, autumn and winter promise “the economy will still come into being” in Europe’s most important economic area, according to Economics Minister Robert Habeck, who is forecasting “a difficult winter”.
This fall, the increase in energy prices will be passed on to end consumers
Germans will see their heating and electricity bills soar in the fall if the government allows energy price increases to be passed on to end consumers.
Berlin expects German gross domestic product (GDP) to increase by 2.2% this year, but the Bundesbank is more cautious with an estimate of 1.9%.
Growth remained flat in the second quarter, weighed down by the acceleration in post-war inflation in Ukraine. This is one of the worst performances in the euro zone from April to late June.
This deadly conflict, which began on February 24 with the invasion of Russian troops, ended the recovery in economic activity that began a year ago after the historic recession caused by the restrictions related to the Covid-19 pandemic.