Germany's 6.5 billion euro ($8.63 billion) tax cut next year will leave consumers no more willing to spend because what the government gives with one hand it will take away with the other, economists say. Private consumption, which has fallen in the past two years, accounts for about 60 percent of Germany's gross domestic product and is the Achilles' heel of Europe's largest economy, whose recovery has been almost entirely export-led.
Undoubtedly, the array of tax changes, reduced subsidies and reforms that take effect in 2005 will leave some smiling, but economists believe the winners and losers will balance out.
Joerg Hinze, German economy expert at the Hamburg Institute of International Economics (HWWA), estimates higher tobacco tax will strip one billion euros from consumers and lower tax rebates, such as for commuting, will take four billion more.
New measures to tackle illegal workers and changes to unemployment benefit payments may also each draw an additional 800 million euros from the economy.
"The net effect will be plus or minus zero," Hinze said, although he added the fact that the tax cut comes in January and the fact that some of the negatives hit later may provide an initial lift.
Next year's tax cut follows an even larger reduction at the start of this year, accompanied by increases in health care charges and tobacco taxes that economists say wiped out the feel-good factor.
Retailers say they barely felt a ripple from that cut and believe 2004 will mark a third straight year of falling sales.
Lately, there has been a modicum of hope. A measure of consumer sentiment published by market research firm GfK found "willingness to spend" at a three-year high. And retailers and restaurants on Friday reported a rise in pre-Christmas turnover.
"The tax cut should give some impulse, but we're wondering if it will be enough for the whole year. That's the big question," said Hubertus Pellengahr, spokesman of Germany's HDE retail association.
UNEMPLOYMENT KEY: Yet amid the optimistic murmurings, there are mutterings of gloom. Public transport, medicines and garbage collection will become considerably more expensive for most Germans, while high oil prices have already jacked up fuel and heating costs.
The rise of salaries in Germany in 2005 will be lower than in any other European Union country, according to a study by Mercer Human Resource Consulting.
Even cuts in social security payments, such as health insurance contributions, will be balanced by increases, such as in the cost of cover for replacement teeth. Pensions will be increasingly taxed from January.
"Disposable income will at best be unchanged, but I see a greater prospect of it falling than rising," said HVB Group economist Andreas Rees.
"And those that do have more money, I can imagine they won't be spending it all in the nearest department store," he added.
Optimists say that pent-up German consumer demand is bound to emerge, but HVB argue that a study of unemployment and of the disappointing performance of stock and property prices show Germans have reason to be gloomy and have no appetite to spend. Michael Groemling, macroeconomic specialist at the IW economist institute, believes unemployment is the key.
"The tax cut won't provide that great a boost. The decisive issue is the labour market. I think we're crossing the low point, but if employment does pick up it's really more in two to three years. We're more at a crossroads in 2005," he said.
Germany is undergoing a series of labour market reforms. But like similar reforms in Britain and the United States in the 1980s, pain typically precedes gain.
Indeed, unemployment is likely to draw headlines at the start of the year by approaching the five million mark, albeit mostly due to a statistical change.
Comments
Comments are closed.