States mutiny against Merkel’s tax cut bill

The January 2010 tax cuts planned by Chancellor Angela Merkel's new centre-right coalition faced failure on Friday amid growing resistance from Germany's states. Politicians are now discussing the possibility of pushing the changes back to 2011.

States mutiny against Merkel's tax cut bill
Photo: DPA

Merkel’s conservative Christian Democrats (CDU) and their junior coalition partners the pro-business Free Democrats (FDP) want to adopt a fiscal package worth €8.5 billion including tax cuts and benefits aimed at spurring economic growth. Details include increased child benefits, reduced value-added tax (VAT) in hotels and restaurants, and a reform of business inheritance laws and some cuts in corporate taxes.

But officials from Germany’s 16 federal states – even those led by CDU-FDP coalitions – are increasingly dissatisfied with the package. Their balking threatens to torpedo the vote in the upper house of parliament, the Bundesrat, on December 18.

In a meeting with Merkel on Thursday evening there was talk of extending talks into early next year, which would mean the bill could not take effect on January 1 as planned.

Of the €8.5 billion in tax revenue Germany would miss out on due to the bill, the federal government would shoulder €4.63 billion, the states €2.28 billion and municipalities €1.57 billion.

“We don’t want to be forced by the federal government into taking on debt,” head of the CDU in the state of Saxony Steffen Flath told regional daily Sächsische Zeitung.

But North Rhine-Westphalia’s state premier and CDU member Jürgen Rüttgers told broadcaster WDR5 that the financial burden would be manageable.

Municipal authorities have argued that they are already heavily in debt and would not be able to survive additional pressure.

The plan to reduce VAT for hotels – added to the bill under pressure from the state of Bavaria – is particularly unpopular. It would mean a loss of €1 billion in tax revenues.

Meanwhile economists have also expressed doubts over whether the fiscal package will create economic growth.

Bundesbank board member Thilo Sarrazin told financial daily Handelsblatt on Friday that Merkel should lock herself in a room for two days and think over the issue.

“I am missing any toehold with which we are supposed to approach the problems that really threaten our future,” he told the paper.

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Swedish economy to grind to a halt as interest rates kick in

Sweden faces an economic slump next year that will see economic growth grind to a complete stop, Sweden's official government economics forecaster, has warned.

Swedish economy to grind to a halt as interest rates kick in

Sweden’s National Institute of Economic Research, which is tasked with tracking the business cycle for the Swedish government, warned in its quarterly forecast on Wednesday that greater than expected energy prices, interest rate rises, and stubborn inflation rates, Sweden was facing a significant downturn. 

The institute has shaved 1.6 percentage points off its forecast for growth in 2023, leaving the economy at a standstill, contracting -0.1 percent over the year. 

The institute now expects unemployment of 7.7 percent in 2023, up from a forecast of 7.5 percent given when in its last forecast in June.

“We can see that households are already starting to reign in their consumption,” said Ylva Hedén Westerdahl, the institute’s head of forecasting, saying this was happening “a little earlier than we had thought”. 

“We thought this would have happened when electricity bills went up, and interest rates went up a little more,” she continued. 

The bank expects household consumption to contract in 2023, something that she said was “quite unusual” and had not happened since Sweden’s 1990s economic crisis, apart from in the immediate aftermath of the Covid-19 pandemic. 

This was partly down to a five percent reduction in real salaries in Sweden in 2022, taking into account inflation, which the institute expects to be followed by a further two percent fall in real salaries in 2023. 

If the incoming Moderate-led government goes ahead with plans to reimburse consumers for high power prices, however, this would counterbalance the impact of inflation, leaving Swedish households’ purchasing power unchanged. 

The institute said it expected inflation to average 7.7 percent this year and 4.6 percent in 2023, both higher than it had forecast earlier.

Sweden’s Riksbank central bank this month hike its key interest rate by a full percentage point, after inflation hit 9 percent in August, the biggest single hike since the 1990s.