Tax rises and subsidy cuts to finance Germany’s healing

A sharp rise in VAT and cuts in welfare programmes for the retired and the unemployed are the cornerstones of the treaty between conservatives and social democrats, the partners in Germany’s prospective coalition. 

Savings: Roland Koch (CDU), the influential minister president of the Land of Hessia, and finance minister-designate Peer Steinbrück have together presented a savings package amounting to 15 billion euro. Some conservatives consider the package to be insufficient. In order to meet stability and growth pact conditions, Germany will have to save 35 billion euro by 2007. 

Taxation: There will not be an all-around reform and simplification of income taxation, which was a central point of the conservative agenda. Instead, a VAT rise of 3% (up to 19%) is likely to be part of the agreement between conservatives and social democrats. A so-called wealth tax – a 3% rise of the income tax for people with a yearly income of 130,000 euro or more – is still being discussed, but is very controversial with the CDU. The wealth tax was asked for by the SPD in order to balance the big load lower-income households will have to contribute to financing Germany’s deficit.

Subsidies: Cuts are proposed to subsidies for commuters, for tax deductability of the rent for home office and of tax consultants’ bills, among other things. The threshold for tax-free savings accounts may be lowered, also. On the other hand, the restructuring of subsidies for home-owners is likely to cause additional costs.  

Labour: The upcoming coalition will stick to the labour market reforms initiated by the outgoing red-green coalition, but envisages cuts of 4 billion euro. One day before the planned conclusion of the coalition talks, there is no clarity as to how this amount of money will be saved – in particular since the upcoming coalition wants to raise unemployment benefits in Eastern Germany to the same level as in the West. Tax rises, which the CDU/CSU justified with a need to lower contributions to the unemployment insurance, will now go into reorganising the finances, which means contributions will remain the same or even rise. 

There will not be a legal framework for local or single-company exceptions from sectoral collective bargaining agreements, which the CDU had demanded. 

Dismissal protection will be softened, becoming fully effective only two years after a person has been hired. This was a central point of the conservative agenda. In return, it will become harder to impose time limitations in fixed contracts for employees. The enterprise size threshold for being exempt from dismissal protection will not rise from the present number of ten employees, as the CDU had demanded. 

Social system: Retired persons may have to pay contributions to health insurance themselves. Currrently, their 7% contribution is matched by the state-run pension system. The cut could mean 13 billion euro less tax-financed payments to the pension system, experts say. An overhaul of Germany’s health insurance system has been dismissed until the end of 2006; neither the CDU’s ‘health award’ scheme nor the SPD’s ‘citizen insurance’ found their way into the coalition agreement. 

Civil service: Civil servants are facing cuts to seasonal benefits and an increase in the weekly working time from 40 to 41 hours. 

Nuclear energy: The so-called nuclear compromise, achieved by the outgoing red-green coalition in the late nineties, will not be touched. This means that Germany’s remaining 18 nuclear power plants will be shut down between now and 2022. The CDU/CSU would have favoured longer decommissioning periods. 

Chancellor-designate Angela Merkel  said savings came ahead of tax rises. "This is a precondition for talking about higher revenues." 

However, a number of prominent CDU politicians are criticising the general direction the coalition talks have taken so far: Jürgen Rüttgers, CDU minister president in Germany's biggest Land North Rhine - Westphalia, warned "not to allow the CDU's profile to go to the dogs. The tax reduction party must not become the tax rise party. The debt reduction party must not become the indebtedness party. The party of social market economy must not become the party of arbitrariness." Christoph Böhr, vice president of the CDU, said: "It makes me sick to see how all the talk is about tax rises only. Not a word - let alone a conclusive set of ideas - on how the grand coalition will try to get the five million unemployed that we are soon going to have into paid jobs. As far as I am concerned, I won't put my hand up for a coalition treaty that envisages massive tax rises without bringing down unemployment."

Jürgen Koppelin, a member of the board of the CDU's formerly prospective coalition partner, the FDP, accused the upcoming coalition of electoral fraud and threatened to call for an inquiry committee: "Those who steal from citizens in cold blood and practise unadulterated election fraud must face a lie committee."

The German Trade Union Association (DGB) said: "The most important project for the next years must be to give back to the state the fiscal basis for fulfilling its central tasks." Trade unions say they could live with a VAT rise if its purpose were to lower contributions to the social security system, but not if the money was used for financing the state deficit.

In a rare meeting of minds with the trade unions, Michael Hüther, Director of the Institute of the German Economy (IW), said: "One could not have objected to a VAT rise in order to cut  non-wage labour costs. However, a VAT rise as an instrument for consolidating the budget will be fatal. A rise from 16% to 19% will withdraw 24 billion euro from the financial flow and cost the country around 1.5% of growth."

Peter Heesen, president of the Civil Servants Union  (DBB), said strikes could not be ruled out, even if they are illegal for German civil servants. "If the employer shows a lack of proper care, I can not guarantee that we will uphold the strike ban. We have already endured 15 years of saving measures. There is nothing more to be had with us." 

No clear winner emerged from the 18 September 2005 election. This brought the Christian Democrats (CDU), their Bavarian sister party (CSU) and outgoing chancellor Gerhard Schröder's Social Democrats (SPD) to the negotiating table. The grand coalition that they will most likely form will have to face the challenge of combatting at the same time high unemployment of almost 5 million, a deficit in breach of the Stability and Growth Pact every year since 2002, and a still depressed business climate.  Because of this challenge and following a request from the forthcoming Merkel government, Joaquín Almunia, commissioner for economic and financial affairs, has given Germany one more year - until the end of 2007 - to bring its budget into line with the pact. 

The CDU/CSU and the SPD hope to find agreement on all crucial issues in a 11 November 2005 discussion round.

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