High Time to Cut Germany's Tax Burden, Economists Tell Merkel

  • Lack of investment cited as threat to Germany’s outlook
  • ECB urged to shift stance in report by economic institutes

Germany’s leading economists called on the government to rein in taxes and social-security costs that have exceeded 40 percent of economic output, prodding Chancellor Angela Merkel as she campaigns for a fourth term.

With Germans going to the polls in September, the report by five research institutes said a lack of investment, especially in education, is threatening the long-term health of Europe’s biggest economy. For now, the outlook is “favorable” and the average inflation rate is set to stay below 2 percent in 2017 and 2018, according to the report published Wednesday.

“It’s high time that economic policy is more closely aligned to the long term and that it limits the increase in tax and social insurance burdens and strengthens investment expenditure, particularly in the area of education, through budgetary reallocations,” the institutes said in the report.

The recommendations offer campaign ammunition to Germany’s political parties ahead of the Sept. 24 election. Finance Minister Wolfgang Schaeuble, of Merkel’s Christian Democratic Union, says he sees scope to cut taxes by 15 billion euros ($15.9 billion) annually after 2017. The Social Democrats, the second-biggest party, say across-the-board income tax reductions would be unfair.

ECB Policy

Taxes and social-insurance contributions accounted for 40 percent of German gross domestic product last year and are expected to rise to 40.2 percent by 2018, the highest since 2000, the institutes said. Reducing the burden is important because Germans will have to spend even more on health and pension insurance as the population ages, according to the report.

The group called on the European Central Bank to start a “monetary policy reversal” this year and “let the purchase program expire at the beginning of 2018, provided that the economic recovery proves to be sustainable.”

The independent group, which includes the DIW, Ifo, IfW, IWH and RWI institutes, submits recommendations to the government twice a year.

The German economy will grow 1.5 percent this year and 1.8 percent in 2018, the institutes said, raising their forecasts from 1.4 percent and 1.6 percent, respectively. The jobless rate will drop to 5.4 percent by 2018 from 6.1 percent in 2016 while the budget surplus will decline to 0.5 percent of GDP by 2018 from 0.8 percent in 2016.

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