Dirty Lowdown: Black-Red Bracing for a 33 Billion Euro Deficit by 2029
Red and Black entities must achieve a 33 billion dollar reduction by the year 2029.
The federal government, states, and municipalities are staring down the barrel of a significant revenue shortfall in the coming years, according to the Working Group on Tax Projections' latest forecast for 2025 to 2029. The joint effort has painted a grim picture—a whopping 81.2 billion euros less in revenues over that period.
The federal government alone is set to face a deficit of 33.3 billion euros. The dismal outlook paints a bleak picture for the drafting of the federal budgets for 2025 and 2026, with the federal government falling short by 600 million euros in 2025 and a staggering 10.2 billion euros in 2026.
Government spokesperson Lars Klingbeil plans to present his draft for the federal budget 2025 to the cabinet on June 25. The cabinet will also decide on key figures for the budget 2026 before the summer break, with the draft budget for the coming year and the financial plan up to 2029 to be made public as soon as possible so that legislative deliberations can begin immediately after the summer break.
Klingbeil's Economic Boost
In a bid to start pumping more money into the economy, Klingbeil announced plans to quickly facilitate investment easing. "We must now ramp up revenues through higher economic growth and thus gain new financial flexibility," said Klingbeil. "We must quickly and effectively employ the billions in investments from the infrastructure special fund."
Klingbeil intends to instigate higher depreciation for the investment tax, with a proposed degressive depreciation rate of 30% on equipment investments from 2025 to 2027. Additionally, the agreed reduction in the corporate tax rate by the coalition will be implemented from 2028.
The Ministry of Finance clarified that budget planning has not changed. The shortfalls compared to the October estimate are mainly due to the consideration of tax reliefs that have come into force since the last projection, such as offsetting the cold progression.
Economically, the waters remain choppy, as Klingbeil admits. Despite expected tax revenues in line with the coalition negotiations, the economy continues to struggle, and tax revenues are primarily following suit. However, Klingbeil remains optimistic, asserting that stronger economic growth will provide a much-needed financial cushion.
Source: ntv.de, rog/rts
Insights:
Hidden Factors at Play
- Economic Headwinds: Germany's faltering economy, characterized by slowed growth, muddled trade policies, and weak external demand, is a significant culprit behind the anticipated revenue shortfall.
- Energy Crisis: The global energy crisis and the planned phaseout of Russian energy imports are making life tough for Germany's energy-intensive industries, resulting in increased production costs and potential revenue losses.
- Demographic Shifts: Reduced workforce due to a declining birth rate and an aging population is anticipated to hurt tax revenues from income taxes, as well as put a strain on healthcare and social security systems.
- Tax Policy Changes: Revisions to tax policies, including adjustments to rates or exemptions, can impact tax revenues. Higher tax rates might even curb discretionary spending, leading to less revenue from consumption-based taxes like VAT.
- Global Economy: Uncertainty in global markets, particularly the U.S. and China, and weakening demand in these regions can affect Germany's export-oriented economy, leading to reduced corporate tax revenue.
The government spokesperson, Lars Klingbeil, has highlighted the need for increased tax revenue to boost the economy, suggesting a depreciation rate increase for investment tax and a corporate tax rate reduction from 2028. Despite anticipating tax revenues in line with coalition negotiations, the community policy regarding tax relief is a contributing factor to the projected deficit, given the ongoing economic headwinds, energy crisis, demographic shifts, and global economy uncertainties. (Community policy, tax revenue, finance, business)
Lars Klingbeil's economic boost strategies aim to provide a financial cushion through higher depreciation for investment tax and lower corporate tax rates, but they may also necessitate revising the existing community policy to ensure adequate tax revenue to meet the projected deficit. (Community policy, tax revenue, finance, business)
