Germany promises €1.5bn tax cut for 2016

Angela Merkel's government is planning to give German taxpayers a €1.5bn tax cut next year, in a surprise handout from a generally parsimonious administration.

But at around 0.05 per cent of gross domestic product, it will put only a modest amount of extra money into consumers' pockets and so may do little to quell demands from foreign critics, led by the International Monetary Fund, that Berlin should do more to stimulate domestic growth.

Far from changing tack on economic policy, Wolfgang Schauble, the tough finance minister, is responding to an unexpectedly strong surge in tax revenues generated by faster-than-forecast economic growth.

With a budget surplus last year and another planned for 2015, he is taking advantage of some fiscal manouevering space to funnel extra cash into taxpayers' hands from next January - in time for Germans to feel the benefits before the next parliamentary election in autumn 2017.

The move highlights Germany's economic strength at a time when many other EU countries are suffering from stagnation, high unemployment and heavy public debt.

"This won't create new riches for any individual taxpayer, " said Tobias Hentze, of the Cologne-based IW economic institute, "but it represents a first, long overdue step in the right direction."

Mr Schauble's plan involves raising the thresholds at which different rates of tax are paid for the first time since 2010. This will counter the effects of so-called fiscal drag or bracket creep, the automatic increases in tax that come through inflation. The proposed increase for 2016 is 1.5 per cent, roughly in line with the German inflation rate.

"I am proposing that we now solve the fiscal drag problem," said Mr Schauble, announcing his plan. With his typical caution, he did not commit to regular annual adjustments after 2016 - saying only that there would be two-yearly reviews.

Even so, the move was welcomed by MPs in his conservative CDU/CSU bloc and their social democrat partners, who had campaigned particularly hard for reform on the grounds that fiscal drag weighed especially heavily on poorer working people. Sigmar Gabriel, the SPD leader and economy minister, said: "The economic upswing must benefit workers."

The announcement came after the finance ministry's independent tax advisory panel reported that German tax revenues would rise more over the next five years than previously forecast.

Receipts at the federal, state and local level would grow by around €6.3bn more than expected this year and by €7.8bn next year. The total extra revenue gain over 2015-19 is put at €38.3 bn more than the previous forecast six months ago.

The economy ministry raised its 2015 gross domestic product growth forecast to 1.8 per cent last month from 1.5 per cent in January, citing a consumer-spending boost driven by rising employment, declining unemployment and growing wages. Private sector economists predict Europe's largest economy could grow by as much as 2 per cent this year.

German growth is pulling the rest of the eurozone along. The European Commission this week raised its forecast for eurozone GDP growth this year to 1.5 per cent, up from a predicted 1.3 per cent in February. As well as Germany's strength, external influences are playing a role, including the euro's depreciation and the oil price drop. But the commission warned of risks, notably the Greek crisis.

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