May 14, 2020 / 1:45 PM / 16 days ago

Germany plans fiscal splurge despite plunging tax revenues

BERLIN (Reuters) - German Finance Minister Olaf Scholz said on Thursday that a massive plunge in tax revenues will not stop the government from presenting a stimulus package next month to help companies recover from the coronavirus crisis.

FILE PHOTO: German Finance Minister and Vice-Chancellor Olaf Scholz attends a session at the lower house of parliament, Bundestag, as the spread of the coronavirus disease (COVID-19) continues, in Berlin, Germany, April 23, 2020. REUTERS/Axel Schmidt

The German economy, Europe’s largest, is facing its deepest recession since World War Two, even though a lockdown to contain the spread of the virus is being gradually eased. The plunge in business activity is pushing down tax revenues and tearing a gigantic hole in the public finances.

But Scholz, presenting the state’s updated tax estimates, made clear that he was in favour of adopting a more expansive fiscal policy to pull the economy out of the crisis.

“Early in June, we in the government want to agree to a comprehensive package of measures, an economic stimulus package that should bring new momentum and new growth,” Scholz said.

Germany expects tax revenues on all state levels to come in 98.6 billion euros lower this year than previously projected, a document by finance ministry officials and tax experts showed.

In the medium term until 2024, the hole in tax revenues for federal and state governments as well as municipalities is seen widening to 315.9 billion euros. The federal government faces 44 billion euros less in tax revenues this year than previously projected and even 171.1 billion less until 2024.

Scholz said the government would not adopt a restrictive fiscal policy to make up for the shortfall, saying: “Now is not the time to engage in austerity.”

The fiscal stimulus measures will be timely, targeted, temporary and transformative, with climate protection one of the government’s guiding principles, Scholz said.

The package should include measures to help municipalities stabilize their public finances, Scholz said. He also reiterated that it was in Germany’s own interests to help other European countries recover from the pandemic.

Germany has approved an initial rescue package worth over 750 billion euros to mitigate the impact of the coronavirus outbreak, with the government taking on new debt for the first time since 2013.

The first package agreed in March comprises a debt-financed supplementary budget of 156 billion euros and a stabilisation fund worth 600 billion euros for loans to struggling businesses and direct stakes in companies.

Eckhardt Rehberg, budget chief of Chancellor Angela Merkel’s conservatives, said the government should focus on stabilizing the public social security system with cash injections, helping businesses with the fiscal stimulus programme and supporting other European countries during the economic recovery.

Asked what spending wish the government should reject, Rehberg said that he was against another ‘cash-for-clunkers’ programme to support Germany’s car industry as the sector itself still had large financial reserves.

“Instead of mulling cash incentives to buy a new car, it’s better to think about (supporting) innovation in this area and not only in one sector, but also in other sectors,” Rehberg told ARD public broadcaster.

Additional reporting by Holger Hansen; Editing by Madeline Chambers and Alexandra Hudson

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