Tax Cuts Likely Counter-Financed Elsewhere If Implemented

Germany's traffic light coalition is planning to implement a fiscal package including corporations tax cuts, worth about E7bln in first estimates, to strengthen the weak economic conditions prevailing in Germany, Bloomberg reports.

• The plans are not a major surprise as both finance minister Lindner and minister of economic affairs Habeck recently acknowledged the weak condition of the German economy, whose 2024 growth forecast was downward revised to +0.2% (from +1.3%) in February. Another fiscal package, worth E3.2bln, was recently passed in Bundestag but criticized as too small in size to provide a meaningful impact on the German economy.
• 2023 corporations tax cash income raised jointly by the the federal "Bund" and the individual states was about E51.1bln in 2023. E7bln would be a substantial amount of that but the cuts seem likely to be targeted towards a wider set of taxes on corporate activity. Coalition member "The Greens" might push towards cuts fostering the CO2-transition, in particular. Total 2023 German tax revenue (excl. municipality taxes) was about E830bln, for reference.
• Fiscal headroom in Germany continues to be limited after the constitutional court ruling from last November enforced tighter adherence to the fiscal debt brake in place, so the measures would likely have to be counter-financed especially if they are planned come into effect in 2024, as this year's budget fully exhausts the debt brake limits as of now.
• Counter-financing measures could be expenditure cuts, tax increases elsewhere (which coalition partner FDP would oppose), or specific loopholes to increase fiscal space (which the government made apt use of after the ruling).
• The above-mentioned previous fiscal package got partially scrapped in size (now worth E3.2bln, down from about E7bln planned previously) and is mainly focused on more favourable depreciation methods for corporations. On the final implementation of the act ("Wachstumsschancengesetz"), after Bundestag approval, the government is facing ongoing discussions with largest opposition party CDU, whose approval would be needed for Bundesrat passing, scheduled for March 22.