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Angela Merkel plan to give German taxpayers €1.5b tax cut in 2016

Angela Merkel plan to give German taxpayers €1.5b tax cut in 2016

BERLIN: 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 Schäuble, 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 manoeuvring 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 Schäuble’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 Schäuble, 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.