16 May 2006

EZA 741Briefing note:

Germany – Fiscal Policy

The tax increases announced by minister Peer Steinbrück on 11 May confirm the coalition agreement, highlighting fiscal consolidation as top priority. Key changes will be the 3% hike in VAT (to19%) a sharp cut in commuter’s tax allowance and a – symbolic – 3% tax surcharge on the top income tax bracket. According to the 12 May tax estimate this will boost revenues by almost 1% of GDP next year – hence allowing a decline of the general government deficit below 2.5% (after 2.9%) this year. The tax estimate is based on very conservative growth assumptions (2% nominal GDP growth in 2006, 2.3% in 2007), helping to re-establish fiscal credibility and to resist spending demands – notably for health care and labour market reform. The biggest economic risk stems from the undue burden for private consumption as a consequence of higher tax rates.

Asset conclusions: sounder finances boost Germany’s fiscal credibility in the euro area helping achieve lower deficits (and relief for bonds) in the euro area.

© Graham Bishop