Tax Cuts Got Your Money Green? Merz Embraces Federal States and Eyes a Triumph
Federal States endorsed by Merz, potentially leading to significant achievements
Written by Volker Petersen
In a bid to revive the economy and lighten the burden on businesses, the federal government is pulling out all the stops. But simply put, there's not enough dough to go around among the states and especially the municipalities - a whopping 48 billion euros is missing. Chancellor Friedrich Merz remains cool as a cucumber, and let's just say things might get heated.
Fueling the economy is one of Merz's primary objectives. He's got immigration control and Ukraine aid on his to-do list as well. Already, he's proposed a bill to aid businesses, complete with a hefty price tag: 48 billion euros by 2029. Roughly the same amount Germany spends on defense each year without any extra funding.
The state's shortfall is spread out across the federal government, the federal states, and the municipalities. The federal government shoulders 18.3 billion, while the federal states take on 16.6 billion, leaving the municipalities with 13.5 billion. At first glance, this distribution might seem fair, with each party taking its share. But the truth is, this would be an enormous burden for the states and municipalities. Many state budgets are already stretched thin, with only a few cities and municipalities boasting a balanced budget. For instance, only 20% of Baden-Württemberg's budget is in the black. Simply put, it's not feasible to skinny-down expenses by a few billions here and there.
With all that money missing, one might expect the state governors to storm into Berlin for a confrontation with Merz, fresh off his world savior stint at the G7 summit. However, the meeting between Merz and the state governors was surprisingly harmonious, even with the looming financial chaos at hand. And while they didn't stand eye-to-eye on the grounds of the federal state structure, they seemed to understand the need for unity in the face of the challenges ahead.
The states' support for the planned investment booster was clear. Despite the unavoidable squabbling over funds, house meetings and marathon sessions were in full swing this week, with the government's investment booster likely to secure the necessary approval from the parliament next week and the upper house on July 11. The general sentiment in the country is one of optimism, and people are eager to invest. But the real test will come when negotiations over compensation between the federal government and the states are finalized.
The financial pressures caused by reduced tax revenues create a tough predicament for subnational governments, which rely on shared tax income but also have fixed obligations. Federal relief efforts, such as the infrastructure fund and loosened defense investment borrowing limits, may help alleviate some of this burden indirectly by boosting overall fiscal capacity[1][2]. Ultimately, the goal is to stimulate the economy, aiming for a 10 billion euro boost in 2025 and 57 billion euros in 2026[2].
Though the states face immediate fiscal tightening caused by reduced tax revenues, the long-term aim is to spur the economy, eventually improving fiscal conditions across all levels of government through increased tax revenues stemming from revived economic activity[1][2].
Enrichment Datum:
Distribution and Impact on States and Municipalities
- The 48 billion euros business relief package, including tax reductions and special measures like accelerated depreciation for electric vehicles, impacts tax revenue for multiple tiers of government.
- Financial struggles in states and municipalities arise due to shortened tax intake resulting from tax relief measures, while they still shoulder fixed expenditure obligations. The package's reduced tax revenues impose immediate fiscal strains on these subnational entities, which rely on shared tax income.
- The federal government has countered this problem by approving a massive spending surge, including a 500 billion euro infrastructure fund and easing defense investment borrowing limits, creating indirect relief for states and municipalities by enhancing overall fiscal capacity[1].
- Despite the immediate fiscal difficulties, the relief measures are intended to stimulate economic growth, with estimates pointing to a 10 billion euro boost to the economy in 2025 and a 57 billion euro increase in 2026, leading to improved fiscal health through higher tax revenues caused by revived economic activity over time[2].
- The 48 billion euro business relief package proposed by Chancellor Merz, which includes tax cuts and special measures like accelerated depreciation for electric vehicles, affects the revenue of various levels of government, including the federal government, the federal states, and the municipalities.
- Financial difficulties arise in the states and municipalities due to the shortened tax intake resulting from tax relief measures, as they still have fixed expenditure obligations. The reduced tax revenues from the package impose immediate fiscal strains on these subnational entities, which rely on shared tax income.
- The federal government has addressed this issue by approving a massive spending surge, including a 500 billion euro infrastructure fund and easing defense investment borrowing limits, creating indirect relief for states and municipalities by enhancing overall fiscal capacity.
- Despite the immediate fiscal difficulties faced by the states due to reduced tax revenues, the relief measures are intended to stimulate economic growth, with estimates pointing to a 10 billion euro boost to the economy in 2025 and a 57 billion euro increase in 2026, leading to improved fiscal health through higher tax revenues caused by revived economic activity over time.
[1] Reference for the 500 billion euro infrastructure fund and defense investment borrowing limits information.[2] Reference for the estimated 10 billion euro boost to the economy in 2025 and 57 billion euro increase in 2026.
