The German Federal Government would be well advised to continue along its path toward budget consolidation and to use budget surpluses - predicted to appear as of 2010 - to lower taxes. This is the conclusion reached in a current study conducted by RWI Essen. It is based upon a forecast of government revenues and expenditures for the years 2008 to 2012, this being based in turn on the Federal Government's medium-term projection for overall economic development.

In the interest of strengthening the forces driving growth, the Federal Government ought to adhere to its budget consolidation path and then use the financial latitude opening up as of 2010 to introduce tax relief. That is the course advocated by economists at RWI Essen in an article written for the current edition of the scholarly journal "Wirtschaftsdienst - Zeitschrift für Wirtschaftspolitik". Their recommendations are founded upon their medium-term prognosis for fiscal development. This is based both on the Federal Government's current medium-term projection for overall economic development and on the forecasts worked out by the tax revenue estimating committee.

In making their calculations, however, the scientists are presuming a steeper rise in government expenditures. These will expand substantially in the current year and the coming year, but over the medium term that expansion will again be reined in. From 2010 to 2012 outlays, growing by 2% per year on average, may well expand by half a percentage point more than what is still being postulated by the Federal Government in its current "Stability Program". At the same time government revenues will most likely grow at an annual average of 2.6% through the year 2012. In this way, following a budget deficit of 5 billion euros this year, a balanced budget can be expected as early as next year. The authors are expecting surpluses for subsequent years - coming to 5 billion euros in 2010, 15 billion euros in 2011 and 23 billion euros in 2012.

As of 2010: financial latitude for tax reductions

Thus budgetary leeway will become available which, once a budget surplus is achieved in 2010, ought to be used to underpin growth. Fiscal policies directed primarily at debt reduction would, by comparison, trigger high opportunity costs. They would comprise, among other things, accepting "hidden" tax increases and the retention of a corporate taxation system that lacks transparency and is not at all neutral in regard to business decisions. This would also mean accepting high non-wage labor costs and foregoing higher investments in education and infrastructures.

The scientists at RWI Essen advocate tax relief beginning in 2010. Included here would be raising the deductibility caps for health and nursing care insurance premiums, as is in fact required by the Constitution. Other relief would include higher basic personal exemptions and exemptions for children in accordance with the upcoming recalculation of the minimum subsistence level. Moreover, "hidden" tax increases should be eliminated during the upcoming legislative period by adjusting several factors to compensate for inflation; these are the income tax rates themselves, personal exemptions and the deductions used to calculate taxable income. "Indexing" in this way keeps taxpayers who receive wage raises that simply compensate for the general rise in prices from being propelled into a higher marginal tax bracket. Were this to happen, their tax burden would increase even though their actual earning power has not risen.

But even more comprehensive relief and higher government investment expenditures - e.g. for infrastructure or for education and research - would not endanger the budget consolidation already achieved. To do this, however, it would be necessary to mobilize the willpower needed to shape those changes and to implement them by keeping overall government expenditures narrowly limited - as has been announced in the Government's current stability program.

For further information, please contact:
Heinz Gebhardt, Phone: +49 201 8149-251, e-mail
Sabine Weiler ( RWI Press Office), Phone: +49 201 8149-213, e-mail

This press release is based on an article for the scholarly journal "Wirtschaftsdienst - Zeitschrift für Wirtschaftspolitik". Journalists can get a free copy of that article. If you are interested just write a short e-mail.