Chancellor Angela Merkel’s refusal to raise taxes is clashing with her prospective coalition ally’s calls to boost public spending, a demand shared by international critics of Germany’s trade surplus.
As Europe’s biggest economy faces an estimated public-investment shortfall of more than 300 billion euros ($406 billion), talks on public investment between Merkel’s Christian Democrats and the Social Democratic Party have stalled as she seeks to form her third-term government.
“Any move that looks like a tax increase, even cutting tax breaks, is getting an entrenched ’no’ from CDU coalition negotiators,” Norbert Walter-Borjans, the SPD finance minister of North Rhine-Westphalia state and a participant in the talks, said by phone yesterday. “Budget restraint is ruling out new borrowing so how can investment by financed? Paying for programs from hidden off-budget accounts won’t do.”
Merkel rejected tax increases as “poison” for the economy during her re-election campaign and has defended her policy of fiscal restraint against criticism by the U.S., the European Union and international organizations. Her Christian Democratic Union and its Bavarian CSU affiliate are seeking to complete a draft coalition contract with the SPD by Nov. 27.
Both sides have pledged to narrow the investment gap and boost domestic consumption, while differing on the scope.
“The demands of all the coalition partners are conditional on the availability of financing,” Finance Minister Wolfgang Schaeuble said in a Nov. 18 Bild newspaper interview. “But new debt and higher taxes are non-negotiable.”
CDU negotiators have dismissed a list of 20 SPD proposals for cutting tax subsidies to boost revenue, Walter-Borjans said.
Closing tax loopholes would help meet SPD campaign pledges of gradually boosting spending on education and infrastructure from roads to broadband by 10 billion euros and 5 billion euros, respectively. Merkel has promised to raise infrastructure investment by 1 billion euros annually.
Public investment in Germany hasn’t kept pace with depreciation over that past decade. Municipalities, which are responsible for local infrastructure, have an investment backlog of about 128 billion euros, the government-backed KfW development bank said in March.
Compared with the euro-area average over the last 10 years, the shortfall at federal, state and local levels is more than 300 billion euros, the Dusseldorf-based IMK economic institute said in a report in October.
At its annual convention last week, the SPD joined calls on Merkel by the International Monetary Fund, the U.S. Treasury Department and the European Commission to adjust Germany’s focus on exports.