German Economics Institute Argues Against Post Election Tax Cuts

by Ulrika Lomas, Tax-News.com, Brussels

14 September 2009

In a recent publication, DIW Berlin, the largest economic research institute in Germany, announced that there will be no scope for the new government to implement tax cuts following the September elections, given the increasing gap between State expenditure and income.

The DIW institute has also warned that any attempts to reduce the effects of fiscal drift will have dire consequences for the national economy, resulting in additional losses for the State of around EUR25bn. Fiscal drift or “kalte Progression” is a phenomenon whereby monetary depreciation and salary increases, coupled with unchanged taxes means that a larger proportion of tax is levied on earners.

Latest figures from the institute show that the State deficit is due to rise to around 6% of GDP in 2010. They also reveal that the country will be left with an annual structural State deficit of between EUR50bn and EUR75bn, once the economy recovers, predominantly due to the government’s ambitious economic stimulus packages.

In order to consolidate the budget, the institute is advocating a reduction in government spending, coupled with an increase in taxes during the next legislative period, once the crisis is over.

The institute is also calling for a reform of health care in Germany, anxious that government contributions to health insurance are one of the greatest contributors to costs.

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