Tax Reforms Limited to E3.2bln; Friday's Acceptance Doesn't Imply Passing

The German government's plans on a fiscal package ("Wachstumschancengesetz") to combat the struggling economy, whose 2024 growth projection was recently downward revised to +0.2% (from +1.3%) by the fedeal ministry of economic affairs, face ongoing misalignment between the traffic light coalition and opposition parties. This might result in the act not being put into place eventually even though it was approved by the parliement (Bundestag) since approval of the state legislative chamber (Bundesrat) is still outstanding.

• The relief size was adjusted downwards during the ongoing negotiations, the final version was limited to a size of E3.2bln (down from E7bln according to newspaper SZ), with large parts being scrapped in the process. Measures still planned include more favourable amortization methods (especially for the real estate industry as well as small and medium enterprises) and tax incentives for enterprise R&D. Additionally, the act includes plans for a reduction of bureaucracy in the enterprise sector.
• The largest opposition party CDU is calling for a withdrawal of the plans to stop the tax relief on agricultural diesel. CDU approval would be needed in the Bundesrat, the German legislative body representing the 16 states. The Bundesrat vote is scheduled for Mar 22.
• Even if the package will be passed, it is highly questionable a package of E3.2bln would be large enough to have a major impact on the German economy. The debates show that the government is aware of the ongoing weakness in the domestic economy. However, given its tighter-than-expected fiscal limitations following the constitutional court ruling last November, the bar to substantial fiscal measures to help increase growth remains high.

On another note, finance minister Lindner (FDP) is planning to abolish two of the current five income tax classes in Germany, newswire Bild reported, which would remove a favourable tax treatment for married couples and registered civil partnerships with an unequal income distribution.