Germany won’t extend VAT cuts beyond the end of the year because it sees the national economy recovering more quickly than predicted.
In an interview with the Rheinische Post published August 30, Finance Minister Olaf Scholz said Germany would not extend VAT cuts because their temporary nature and “sufficiently large” volume created the “maximum economic effect.”
On June 29 Parliament approved a €130 billion legislative package that included a reduction in the standard VAT rate from 19 percent to 16 percent until the end of the year. The measure was expected to reduce VAT collection by approximately €20 billion, according to a June 29 release. VAT accounts for about one-third of Germany’s revenue, and in 2019 VAT grossed more than €243 billion in tax revenue.
Although the VAT reduction will expire, Scholz said that next year 90 percent of individual taxpayers will not pay the solidarity surcharge (Solidaritatszuschlag), a 5.5 percent supplementary tax on income tax liability. Parliament voted in 2019 to abolish the surcharge for most individual taxpayers, leaving only the top 10 percent of earners liable for the tax, some at a reduced rate.
Next year some taxpayers will also benefit from a €15-per-month increase in the child benefit, Scholz said, as part of the Second Family Relief Act, approved by the Cabinet July 29.
Scholz, the Social Democratic Party's candidate for chancellor in 2021, also told the Rheinische Post that he supports a “performance-based” tax system that includes higher contributions from individuals with higher incomes and lower tax rates for low- and middle-income earners. “Pragmatic politics does not mean sparing top earners and therefore incurring additional debt,” he said.
Germany is looking at a slightly better economic forecast for 2020, revising its predicted contraction of 6.3 percent to 5.8 percent, Economy Minister Peter Altmaier said in a September 1 release. For 2021, Germany expects the economy to grow 4.4 percent (down from a previously projected 5.2 percent), meaning it likely won’t reach pre-pandemic GDP levels until 2022, said Altmaier.
The Ministry of Finance will use the revised forecasts to estimate tax revenue for 2021, which will be updated the week of September 6. Scholz will use the tax revenue estimates to propose the federal government’s 2021 budget, which will include the suspension of debt limits to increase spending if needed.