May 16, 2024
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German Tax Revenue Forecast Slashed, Challenging 2025 Budget Negotiations

Germany's council of tax experts lowered tax revenue projections for the next five years by 1.5%, casting a shadow over budget negotiations and prompting calls for fiscal restraint.
German Tax Revenue Forecast Slashed, Challenging 2025 Budget Negotiations
The Bundestag - Hooch Media - Unsplash

Germany faces a potential fiscal hurdle as the council of tax experts recently revised their tax revenue forecast downward by 1.5% for the 2024-2028 period. The adjustment translates to an €80.7 billion ($87.7 billion) decrease in total expected revenue, with the federal government's share alone amounting to €41.6 billion less than previously anticipated.

This significant reduction in projected revenue adds a layer of complexity to the already challenging negotiations surrounding the 2025 budget. Finance Minister Christian Lindner, highlighting the revised forecast as a "reality check," stressed the need for an economic turnaround rather than increased debt.

The downward revision in tax revenue estimates exacerbates the existing gap between the spending aspirations of various ministries and the available resources. While ministries are pushing for increased spending, the finance ministry remains steadfast in its emphasis on fiscal consolidation. With the projected revenue for 2025 now €11 billion lower than the October forecast, this disagreement is amplified.

Lindner, presenting the new forecasts, underscored the importance of aligning the budget with the means provided by taxpayers. He emphasised that the revised estimates dispel the notion of limitless funds and highlight the importance of prudent fiscal management.

The lowered forecast aligns with the prevailing economic weakness in Germany. The country experienced a 0.2% contraction in GDP last year, attributed to factors such as high energy costs, sluggish global orders, and record-high interest rates. The government's growth forecast for the current year stands at a modest 0.3%, a figure more optimistic than the 0.2% predicted by the German Council of Economic Experts.

The impact of the revised forecast extends to all levels of government. Federal, state, and municipal revenues are expected to be lower than initially projected. Lindner acknowledged the potential risks associated with reduced revenue and highlighted the need for scrutiny over expenditure.

The budget negotiations are anticipated to be particularly challenging in light of the ministries' substantial spending requests. Further discussions within the coalition government, comprising the Social Democrats (SPD), Greens, and Free Democrats (FDP), are expected.

Despite the complex negotiations, Lindner expressed confidence in the government's ability to approve the initial budget draft by July 3rd, ahead of the summer recess. The Bundestag, the lower house of parliament, will then deliberate on the draft starting in September, with a final decision anticipated by the end of November 2024.

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