German economy ‘deteriorating’, says finance minister

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The war in Ukraine has driven up energy costs around the world, driving up inflation in virtually every major economy.

But a specific convergence of crises this summer means Germany could be on the cusp of an even more dramatic economic downturn than other places.

On Wednesday, German Federal Finance Minister Christian Lindner unveiled a proposal for a comprehensive tax relief package worth more than 10 billion euros (about $10.2 billion) by the end of the year. end of this year in a bid to reduce the cost of living for average Germans, the AP reported.

But the plan has been controversial within Germany‘s ruling three-party coalition, prompting Lindner to quickly justify it by detailing how bad the economic situation is getting in Germany, explaining how policies that once seemed radical might be needed.

“Our country’s economic prospects have become fragile,” Lindner told reporters in Berlin on Wednesday after announcing the tax adjustments. “The economy is deteriorating.”

Germany’s tax structure

Lindner’s tax relief proposal was detailed on Wednesday by German news outlet DW.

The government would not cut taxes directly, but rather raise the income thresholds that determine tax rates. The Ministry of Finance will increase the tax-free allowance (the income level at which Germans start paying tax) by €600 by 2024. The ministry also plans to increase child benefit payments slightly and will raise the bar revenues that trigger the country’s crisis. top tax rate of €58,597 (about $60,500) to €63,515 ($65,600) by the end of next year.

Not all members of Germany’s three-party ruling coalition agreed with Lindner, who is the chairman of the economically liberal Liberal Democratic Party of Germany. Members of the other coalition parties – the Greens and the Social Democrats – said the changes were “regressive” and would disproportionately benefit the wealthy compared to those on low incomes. And the new structure will result in more than $18 billion in tax revenue cuts by 2024, when the comprehensive changes take effect.

But Lindner described the proposed changes as necessary to help Germans manage soaring energy costs.

fragile economy

Germany’s annual inflation rate is currently 7.5%, exacerbated by rising energy and electricity costs since the Russian invasion of Ukraine in February.

Gas prices in Europe have risen, in part due to reduced supplies from Russia along the Nord Stream 1 pipeline as well as high temperatures and dry conditions affecting power generation at major gas suppliers. European energy companies such as Norway and France.

Germany has arguably been the hardest hit by rising gas prices due to a long-standing reliance on cheap Russian gas. Before Russia started its war in Ukraine, 55% of all gas consumed in Germany came from Russia.

But if energy prices in Germany are currently bad, they could get even worse. Consumers have yet to feel the full brunt of rising costs as utilities normally lock in prices for the year. If the supply shortage continues, energy bills could start rising as early as next year when winter electricity demand picks up, Uniper, a German utility, told Bloomberg last month.

That’s what worries Lindner: Uniper has previously warned that Germans will face a “huge wave” of rising energy costs in 2023.

To prepare for the inevitable crisis, German officials scrambled to build up their gas reserves from alternative suppliers like Qatar and Senegal, and even began recommending energy rationing measures to businesses and consumers. German individuals.

Lindner’s fears of the “deteriorating” German economy echo domestic banks’ increasingly pessimistic sentiments about the country’s economic outlook in recent weeks. The country’s latest GDP figures, released at the end of July, showed growth had stagnated for the second consecutive quarter, leading most German banks to revise their forecasts, with many believing a recession would be likely before the end. of 2022.

Last month, economists at Deutsche Bank, Germany’s biggest bank, wrote that the country was “inevitably headed into recession” due to rising fuel costs and the growing possibility that supply in gas continues to decline next year. The bank also predicted that German inflation has yet to peak, which means more increases in the cost of living for Germans for the foreseeable future.

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