According to Scope Ratings agency, tax cuts are back on the political agenda in Germany to counteract faltering economic growth. Greater public-sector investment and pension reform would be more beneficial areas to support Germany’s outlook.
As the corporate website pointed out, the conservative party has proposed the introduction of pre-emptive tax cuts due to lower than expected growth in 2018 of 1.5% and only moderate growth projections for 2019 (of between 1.4%-1.8%). A popular proposal among the conservatives is the complete and more timely abolition of the solidarity surcharge (0.55% of GDP).
Scope believes that Germany’s structural surplus (0.15% of GDP in 2018) is currently sufficiently large to allow for a degree of fiscal easing; however, tax cuts have only a limited impact in stimulating growth in the economy for several reasons.
Germany’s economy would benefit more from measures, first, to increase investment to raise the country’s low growth potential and, secondly, to stabilize the pension system.
Pursuing tax cuts comes at a politically sensitive time, with Germany governed by the fragile coalition of the CDU and the Social Democrats. Pushing tax cuts might break up the coalition or alternatively lead to more fiscal compromises, among them social spending to satisfy the SPD ahead of European and regional elections in Eastern Germany.