May 16, 2020 / 10:08 AM / 15 days ago

German coalition parties clash over aid package for virus-hit municipalities

BERLIN (Reuters) - German Finance Minister Olaf Scholz has run into opposition from Chancellor Angela Merkel’s conservatives over a plan worth 57 billion euros ($61.65 billion) to help municipalities cope with plunging tax revenues caused by the coronavirus crisis.

FILE PHOTO: German Finance Minister Olaf Scholz addresses the media during a news conference in Berlin, Germany May 14, 2020. Michael Sohn/Pool via REUTERS/File Photo

Europe’s largest economy is facing its deepest recession since the Second World War, even as a lockdown to fight the virus is gradually eased. The drop in business activity has hit tax revenues and left a hole in public finances.

The aid package from Scholz, a Social Democrat (SPD), aims to help cities and towns stabilise their finances with a cash injection worth 12 billion euros to compensate for an expected fall in trade tax revenues, according to a finance ministry document seen by Reuters on Saturday.

The plan also contemplates extra relief for some heavily indebted municipalities worth 45 billion euros.

“This protective shield should not only bring cities and municipalities through the current difficult situation, but also enable them to do their job even better,” Scholz said.

Scholz wants the 16 state governments to shoulder half of the costs and parliament to approve the plan before the end of this year.

Under Germany’s federal system, local authorities are in charge of a large chunk of public investments such as building roads and bridges as well as modernising schools and hospitals.

“The biggest public investors in Germany are our towns and municipalities,” Scholz said. So the emergency aid should also prevent a drop in infrastructure spending on the regional level in the coming years.

Eckhardt Rehberg, budget chief of Merkel’s conservatives, criticised Scholz’s proposal, however, saying there was no agreement yet on the measures.

“Scholz can’t just decide on his own about the federal budget and distribute a double-digit billion euros sum across the country,” he said.

Rehberg pointed out that Scholz needed a two-thirds majority in parliament to implement his proposal, adding: “It’s not clear how he wants to achieve this.”

Scholz said earlier this week that plunging tax revenues will not stop the government from unleashing another fiscal stimulus package next month and that the measures should include emergency aid for struggling municipalities.

Germany expects total public tax revenues to come in 98.6 billion euros lower this year than initial forecasts before the coronavirus outbreak, with municipalities facing a budget gap of more than 15 billion euros. In the medium term until 2024, the hole in tax revenues is seen widening to 315.9 billion euros.

Budget experts say the government will finance the second stimulus package and the emergency aid for towns with another debt-financed supplementary budget of up to 100 billion euros.

In March, the German parliament suspended a debt brake and approved an initial rescue package worth more than 750 billion euros to help the economy cope with the fallout of the pandemic.

The first package already included a debt-financed supplementary budget of 156 billion euros.

($1 = 0.9246 euros)

Reporting by Christian Kraemer and Michael Nienaber; Editing by Andrew Heavens, Helen Popper and Alexandra Hudson

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