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German Bundestag Adopts 2013 Budget

by Ulrika Lomas,, Brussels

29 November 2012

The German Bundestag, or lower house of parliament, has recently adopted the government’s 2013 federal budget, providing for a reduction in the pension insurance contribution by 0.7% to 18.9%, and for the abolition of the highly unpopular practice fee.

According to the German finance ministry, the Bundestag’s decision underscores the successful strategy implemented by the government, which has managed to achieve an almost balanced structural budget after three years of consistent fiscal consolidation. This has been achieved by maintaining expenditure at an almost constant level and by using rising tax revenues to reduce the deficit.

Germany’s 2013 budget provides for a structural deficit of EUR8.8bn (USD11.4bn), corresponding to 0.34% of gross domestic product (GDP). This will enable the government to adhere to the debt brake rule at federal level three years earlier than required.

Enshrined in basic law, Germany’s debt brake rule provides for a maximum structural deficit from 2016 of 0.35% of GDP. The government aims to completely eliminate the structural deficit by 2014.

The finance ministry highlights the fact that the German Council of Economic Experts (der Sachverständigenrat) has also confirmed the government’s successes in terms of structural consolidation of the federal budget, while noting that the Council has called once again for the phenomenon of fiscal drift in the country’s income tax system to be reduced. Consolidation efforts will achieve little success if they rely on general tax rises, the ministry stresses.

Underlining the need for budgetary consolidation to take place without recourse to major tax increases, the ministry emphasizes that the state is not under-financed and warns that it would therefore be wrong to impose hidden tax rises on the country’s low- and middle-income earners by a "lasting acceptance of fiscal drift."

Fiscal drift (also known as ‘bracket creep’) occurs when the government fails to adjust marginal income tax brackets in line with wage inflation, meaning more taxpayers are dragged into the higher income tax bands and thus suffer a tax increase.

Earlier this year the Bundesrat, or upper house, rejected the black-yellow coalition government’s tax cut bill, providing for a progressive rise in the personal income tax allowance by a total of EUR350, or 4.4%, by 2014, to be achieved in two stages: by EUR126 (rising to EUR8,130) from January 1, 2013, and by a further EUR224 (rising to EUR8,354) from January 1, 2014.

In accordance with the bill, income tax bands in Germany will also rise by a total of 4.4%.

TAGS: tax | law | gross domestic product (GDP) | retirement | budget | tax rates | social security | Germany | inflation | individual income tax

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