BERLIN: Germany should use its strong fiscal position to lower taxes, leading German, Swiss and Austrian economic institutes said in a report commissioned by the German government.
The German government balanced its budget in 2014, a year ahead of schedule, and the institutes forecast that Berlin would achieve public budget surpluses of more than 20 billion euros (£14 billion) this year and next.
The leeway that creates should be used to initiate a reform of the tax and levy system,” said the institutes, which have previously urged Chancellor Angela Merkel’s government to take measures to boost investment.
Berlin is unlikely to follow their suggestion as the ruling conservatives and Social Democrats agreed in their 2013 coalition deal not to raise or lower taxes but to use any leeway to boost investment in the euro zone’s largest economy.
Ferdinand Fichtner, an economist at Berlin-based DIW, one of the economic institutes behind the report, said the government could manage to raise spending while also lowering taxes.
The way it looks we have massive surpluses in the public budgets, of 20-25 billion (euros) this year and next, and it looks like it will carry on that way for the next five years,” he told a news conference in Berlin.
He said the DIW, which has repeatedly said the German government is not investing enough, believed this money should be used for specific investment projects including in infrastructure and education.
But there will be lots of money left over. The DIW believes this money would be available to lower taxes and tariffs.”
In their report, the institutes said the government needed to act urgently because hefty social contributions mean labour costs are higher in Germany than in competitor countries.
In Germany the tax wedge between labour costs and net wages, which is created by the contributions to pay-as-you-go social security systems and by the wage tax, is among the highest in the OECD countries,” the institutes said.
So above all the income tax rate — especially for those with low to medium incomes — should be made more favourable to reduce the burden of the labour factor and therefore to increase Germany’s growth potential.”
But Michael Grosse-Broemer, a senior politician from Merkel’s conservatives, and Christine Lambrecht, a member of the Social Democrat junior coalition partners, both suggested the government would not be lowering taxes anytime soon.
They said the government was facing extra costs such as dealing with rising numbers of refugees, with local authorities asking for more help from Berlin.
Those are issues that need to be solved as a matter of priority,” Grosse-Broemer said, adding that it was important not to take on any new debt and it was necessary to continue with the government’s “solid financial policies”.
In the report, the institutes also warned that the European Central Bank’s bond-buying risked inflating asset price bubbles.
