German Cabinet Adopts Budget Plans

by Ulrika Lomas, Tax-News.com, Brussels

13 July 2010

The German cabinet has approved the 2011 budget bill together with the country’s 2014 medium-term financial plan, providing for drastic cuts in spending and containing a raft of unconfirmed, loosely drafted tax proposals.

Given the current record level of debt in Germany of EUR65.2bn, and the need to adhere to the country’s debt brake rule from 2011, the government is determined to reduce new debt by EUR7.7bn over the course of the coming year. By 2014, the government aims to increase this figure yet further to around EUR24bn.

Despite these ambitious plans, key details regarding the proposed savings and tax increases remain open. Although the government has announced its intention to introduce a levy on the country’s nuclear power plant operators, on airlines, on the financial sector and on companies that have up until now benefited from eco-tax breaks, German industry has yet to find out the full extent of these plans.

Indeed, as regards a nuclear fuel tax, much remains up in the air. Given that nuclear power plant operators had vowed to initiate legal action if necessary to prevent the highly controversial fuel tax from entering into force, the coalition government had reportedly indicated its willingness to find alternative revenue streams. While Germany’s Finance Minister Wolfgang Schäuble made clear that the amount of revenue sought by the government is non-negotiable (EUR9.2bn over the course of the next four years), he nevertheless revealed that he is flexible as regards the precise means of obtaining it. Regarding a bank levy, expected to generate in the region of EUR2bn for the state, there are as yet no legal regulations or firm plans in place.

Following months of internal negotiations, the coalition has, however, finally unveiled details of its health care reform plans, containing highly controversial proposals to increase the fiscal burden on both individuals and employers, including a rise in the contributions rate for legal health insurance from 14.9% to 15.5% over the course of the coming year, and plans to grant health insurance companies free rein in future to increase additional contributions for their members, as the government intends to remove the existing cap of 1% of gross income.

According to the Finance Ministry, the austerity measures contained in the 2011 budget bill and the 2014 financial plan are the first important steps along the path to budgetary consolidation, noting that over the course of the next few years, further measures would be taken in accordance with the debt brake rule. Enshrined in basic law, the debt brake rule provides that from 2016 structural new debt in Germany must not exceed 0.35% of gross domestic product.

The budget is due to be debated in parliament at the end of November.

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