Germany bracing for spending cuts as tax revenue shrinks 10 per cent

Germany expects to collect 10 per cent less in tax revenues this year than it did in 2019, the Finance Ministry said on Thursday.

That means that federal, state and district authorities will have 98.6 billion euros (106.6 billion dollars) less to spend than forecast in November, as the coronavirus pandemic tears up the country’s previous budgets.

It is the first time that state coffers are expected to decline in Europe’s biggest economy since 2009, amid the financial crash.

In calculating its estimate, the Finance Ministry put the cost of the government’s coronavirus aid measures at 453.4 billion euros in 2020 alone, not including an additional 800 billion euros in loans that may have to be extended if struggling companies are unable to meet their credit obligations.

The predictions show the costs of the health crisis stretching far beyond this year, with the German state forecast to have some 315.9 billion euros less to spend by 2024 than had been expected last autumn.

The government is predicting the worst recession since World War II on the basis of the spring forecast, which foresees a decline of 6.3 per cent in gross domestic product.

Tax receipts will be hit not only by declining revenue from company and value-added taxes, but also by lower income tax as a result of people working reduced hours.

The 156 billion euros in new debt currently planned in the federal budget for this year will be insufficient to fill the gap caused by the pandemic.

In response, Finance Minister Olaf Scholz is to put forward a major financial package in June aimed at reviving the moribund economy. Not only business, but also Germany’s local authorities are expecting support.

Despite the huge sums, Scholz said Germany was well placed to overcome the crisis.

Speaking in Berlin, he announced an unscheduled additional tax estimate for September before drawing up the 2021 budget. This would allow a more accurate assessment of the reduced government revenue, he said.

There were some words of comfort from International Monetary Fund managing director Kristalina Georgieva, who praised the country’s response to the coronavirus crisis in a newspaper interview.

Georgieva told the Handelsblatt business daily that Germany had “acted very quickly and used its financial leeway.”

This allowed Europe’s biggest economy to test broadly and keep Covid-19 deaths to a minimum, while even taking in patients from other countries, she noted.

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Georgieva also commended Germany for its budgetary discipline.

“In good times it is necessary to make provisions for bad times,” she said.

“Just as the virus hits people with pre-existing conditions hardest, the economic shock hits economies that were previously fragile hardest.” (dpa)