BERLIN: Germany’s cabinet agreed on Wednesday to increase tax relief for companies and households to almost 21 billion euros per year to help bolster stuttering growth in Europe’s biggest economy.
Germany was the worst performing major economy last year, with gross domestic product contracting by 0.3%. It skirted a recession at the start of the year but growth has been slower than expected.
The tax reform, part of an outline 2025 budget deal agreed earlier this month, sets out plans for 20.9 billion euros ($22.7 billion) of annual tax relief, the finance ministry said. That compares to the previously planned 12.8 billion euros.
“The cabinet has cleared the way for a 30 billion euro reduction in the tax burden in 2025 and 2026,” German Finance Minister Christian Lindner said on social media platform X.
A spokesperson from the finance ministry told Reuters thatthe minister was referring to the 21 billion euros from the taxreform and tax relief from another law that will furtherincrease the basic tax-free allowance.
The details of the package, hammered out by Social DemocratScholz’s awkward three-way coalition with the Greens andpro-business Free Democrats (FDP), are now being finalised.
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Chancellor Olaf Scholz, addressing his summer newsconference, described the economic package agreed by thecoalition as “a very comprehensive growth initiative,” which thegovernment hopes will lead to extra growth of more than half apercentage point in 2025, although economists are doubtful.
For companies, the measures include extending until 2028 ascheme allowing firms faster depreciation of their assets, soreducing their tax burden and encouraging them to invest sooner.Tax incentives for research will also be extended.
For households, the tax-free allowance on the lowest incometax bracket will rise by 300 euros to 12,084 euros next year andrise again in 2026. Income tax brackets will be adjusted in linewith inflation for 2025 and 2026, and child benefit will rise.
The plans need the approval of the upper and lower houses ofparliament later this year. They will need votes from oppositionconservatives in the Bundesrat, the legislative body thatrepresents the 16 German states at the federal level.
This could be awkward because states and municipalities willhave to shoulder the bulk of the expected tax revenue shortfall.Of the decline of 21 billion euros in tax revenues, 7.6 billioneuros will be absorbed by the states and 4.8 billion euros bythe municipalities.
Scholz expressed his conviction that this time Germanstates’ representatives would not block the package in the upperchamber, as happened last year with the Growth OpportunitiesAct.