On Wednesday (12.11.) the annual report of the German Council of Economic Experts, which has advised the German government for decades, was presented. This is the first annual report of the government of Chancellor Friedrich Merz, who took office six months ago.
There is no economic recovery in sight
GDP is expected to grow by just 0.2 percent this year. It is expected to reach 0.9 percent by 2026. “After two years of stagnation, the economic outlook in Germany has finally turned from negative to positive this year,” said Monica Schnitzer, head of the Economist Consulting Group, who provided the analysis to Merz in Berlin.
Compared to other European countries, Germany is lagging behind and far from real recovery. “For the economy to return to a sustainable growth path, productivity must increase, specifically through more innovation and investment,” he warned.
Moreover, given the current geopolitical and structural challenges, Germany must develop new perspectives on growth and security policy.
“Reorganizing plans”
“Creating prospects for the future, not wasting opportunities” is the title of this year’s report. This refers to the Special Fund for Infrastructure and Climate Neutrality (SVIK) launched by the coalition government, financed by debt, with a value of 500 billion euros to invest in infrastructure projects.
The five-member council warned that a large portion of the money is used to finance consumer spending, and does not contribute to the creation of new assets.
The report notes that the special fund should not be used to create room for maneuver in the regular budget to finance “questionable measures,” such as expanding the maternity pension or increasing the tax exemption for drivers. “It is therefore urgently recommended to amend these plans if we do not want to miss the opportunities provided by the financial package,” the Council President warned.
These are recommendations, not commitments
Merz agreed with the report that “the high tax burden and social contributions hinder investment in Germany. The price competitiveness of our economy must improve,” he said. This includes tackling the high cost of energy in Germany. He said, “I assure you that the federal government is working intensively in Brussels to find solutions this year.”
Merz reiterated other measures planned to stimulate the German economy: tax incentives to encourage business investment in machinery, equipment and digital transformation; Reducing corporate tax from 2028, and reforming social security contributions.
In addition, contributions to health and welfare insurance, as well as contributions to the pension fund, constitute a major problem, because they have been steadily increasing for years. Germany is an aging society: an increasing number of taxpayers are forced to fund a growing number of retirees. This year, more than 120 billion euros will be allocated to pension funds as subsidies, which is the most important item in the budget.
A lot of wealth and a lot of poverty in Germany
The report also recommends encouraging private savings for retirement. Economic inequality in Germany is high compared to other European countries. The government should promote the accumulation of economic resources through state-supported retirement savings plans.
It is estimated that between 30 and 50 percent of Germany’s economic power comes from inheritance and donations. Business assets, in particular, enjoy very favorable tax treatment. The government intends to prevent companies from being forced to close, because the new owners cannot pay inheritance tax. Paradoxically, very large inheritances and donations tend to be taxed relatively little.
(c m t/q b)
About The Author
