Chancellor Angela Merkel is coming under increasing pressure from Germany’s main economic research institutes – the DIW, IWH, RWI, ZEW and the HWWI – over her government’s economic policy. In interviews carried out by the news agency DDP on Friday, the institute presidents called on the government to consolidate the country’s budget, rather than steeping it in further debt.
The economic experts also criticised the tax cuts planned for the new year by the ruling centre-right coalition of Christian Democrats and Free Democrats, saying that there was no room for manoeuvre in the current budget.
President of the German Institute of Economic Research (DIW) Klaus Zimmermann warned against running the country “at the expense of future generations.” Christoph M. Schmidt, president of the Rhineland-Westphalian Institute for Economic Research (RWI), called the government’s tax policy “unrealisable.”
“Between 2011 and 2016, the state needs to save €37 billion,” said Wolfgang Franz, president of the Centre for European Economic Research (ZEW). “That is a Herculean task.”
Ulrich Blum, president of the Institute for Economic Research in Halle (IWH), had special criticism for the planned reduction of sales tax in hotels from 19 percent to 7 percent. He called this a “sin” and a “nightmare.”
The economic experts pointed to the dangers to the economy posed by the ageing population, which is likely to put a huge strain on the welfare state and state finances in the next ten years. At the end of the decade “the demographic time-bomb will really go off,” said Blum.
Thomas Straubhaar of the Hamburg Institute of International Economics (HWWI) advised the government to follow a different tax policy. He suggested that today’s precarious economic situation did not call for individual tax cuts, but a wholesale tax reform. While cutting direct taxes like income tax was valid, indirect taxes like sales tax needed to be raised to balance this out, he said.
Zimmermann called for a sales tax rate of 25 percent. This might be unpopular, he admitted, “But in the face of a record state debt of €1.6 trillion, a sales tax increase is only a matter of time.”
Schmidt agreed that sales tax may have to be raised sooner or later. “It would be poison for economic growth, but would be politically easier to realise than reducing state subsidies,” he said.