Germany: Bundesbank Criticizes Coalition's Tax Cut Policy

by Ulrika Lomas, Tax-News.com, Brussels

24 November 2009

In its latest monthly report, Deutsche Bundesbank has warned the German government against implementing its ambitious tax cut initiatives. Increased expenditure coupled with reductions in taxation, without a means of financing either, would be a “problematic signal,” it emphasized.

The report highlighted the fact that the country’s state finances are already deteriorating dramatically. Indeed, the government’s recently proposed tax relief measures for families, heirs and businesses, planned for the start of 2010, are due to increase the deficit by an additional 0.5% of GDP, the report revealed.

According to the bank’s most recent figures, Germany’s deficit looks set to exceed 3% of GDP this year, thus exceeding the European Union’s (EU) threshold. This negative trend is set to continue next year, the Bundesbank predicts. The country’s debt rate is expected to reach a new record level (over 75%), and the deficit rate is predicted to rise to around 5%, the bank noted.

In view of Germany’s new debt rule, the report has underlined the need for a strict consolidation of public finances from 2011. Swift and consistent consolidation measures would enable Germany to meet the EU deficit limit again by 2012, it reveals.

The Organization for Economic Cooperation and Development (OECD) has also criticized the tax cut plans of the German government, pointing to rising state debt, and warning against a rise in state spending.

Rising unemployment will lead to an inevitable decline in consumption, the OECD maintains. Indeed, private consumption is set to fall by around 0.5% as a result, it adds. Consequently, the German government’s proposed tax relief measures, announced earlier this year, will do little to boost consumption, it concludes.

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