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From climate action to ‘Soli tax’: What you need to know about Germany’s planned changes

Angela Merkel is returning from her summer break on Monday, but she's in for a busy few months ahead. From climate change action to tax amendments, this is what the government is planning.

Published: 12 August 2019 10:13 CEST

From climate action to 'Soli tax': What you need to know about Germany's planned changes

The solidarity tax will be reduced. Photo: DPA

It’s been a busy year for the Chancellor so far due to an unsettled political climate in Germany, Brexit – and even her own personal health concerns.

So it’s no surprise that Merkel looked relaxed on her summer holiday where she's been taking a few weeks of rest with her husband.

She is set to return to work this week and faces a rocky road with three upcoming eastern state elections and issues that are dividing the population (and the government). Can Merkel's coalition survive?

What's the outlook?

The coalition (known as the grand coalition or GroKo) is made up of Merkel’s Christian Democrats (CDU) and its Bavarian sister party (CSU), along with the centre-left Social Democrats (SPD).

Things have been shaky between the two parties from the very beginning of their most recent union following the 2017 federal election. But both parties – typically known as the Volksparteien (people’s parties) in Germany – are under increasing pressure with three regional votes coming up.

After dismal results in recent state elections, such as Bavaria and Hesse last year, and in the European parliamentary elections in May, both parties face heavy losses when voters in Saxony and Brandenburg go to the polls on September 1st, and in Thuringia on October 27th.

The SPD, currently in free-fall after historically low results in state elections over the past year, are looking for a new leader and there is never-ending speculation about the party pulling out of the coalition which would 'break' the government and lead to elections.

If the GroKo doesn't split apart then the next federal elections are to take place in 2021. Merkel has already said she will bow out of politics and step down as chancellor after this term ends.

Adding to the uncertainty is the possibility of a no-deal Brexit and various domestic issues concerning climate change and migration.

Merkel on her birthday, July 19th, before her summer break. Photo: DPA

Here are some of the major issues that Germany wants to tackle in the coming months:

Climate protection

This topic has been thrust into the spotlight due to action led by activists like Greta Thunberg and the Fridays for Future movement. And Germans have become increasingly concerned about the effects of climate change.

That worry has translated into soaring support for the Green party, which has been neck-and-neck with the Christian Democrats in some recent polls (and even topped a few polls).

Meanwhile, another recent survey showed German voters are in favour of drastic action to protect the climate, such as making flying more expensive and travelling by rail cheaper.

All parties are taking note of this and the Climate Cabinet will meet on September 20th to decide the government’s action plan to reduce CO2 emissions.

CDU leader Annegret Kramp-Karrenbauer on Sunday called for an overhaul of the country's tax system in order to better align Europe's largest economy with its environmental goals.

In the Welt am Sonntag newspaper, Kramp-Karrenbauer, who is also Germany’s Defence Minister, and Union deputy leader Andreas Jung, said tackling climate change deserved to be a top priority in the government's agenda.

She said Germany should offer businesses and residents further incentives to help reduce carbon emissions, such as subsidies for the development of climate-friendly fuels and to improve the energy efficiency of buildings.

Kramp-Karrenbauer also called for the inclusion of sustainable development as a state goal in the constitution, but said she didn't support a 'CO2 tax', an idea that's been debated in recent months.

The budget 2020

How will Germany spend its cash next year? Finance Minister Olaf Scholz, of the SPD, has been calculating what Germany can afford, when and how.

But the Finance Ministry is not known for offering much flexibility. One of the main questions is: how will climate protection be financed? This will require some creative thinking, and possibly new debt – something that Germany as a country is averse to.

Discussions on the budget are likely to take place in September.

A Fridays for Future march in Hamburg on June 14th. Photo: DPA

Basic pension

Earlier this year, Labour Minister Hubertus Heil, of the SPD, presented his plan on introducing a basic pension (Grundrente) in Germany. It would see people who have clocked up 35 years of work, raised children or cared for relatives receive a supplement to their pension. It is intended to help those who receive a small pension.

But the Union is opposed to the basic pension being paid if the person concerned is not in need – for example, if that person has a partner with a good income who can support them. The coalition agreement also provides for means testing. However, Heil (SPD) insists on the model without means testing to avoid bureaucracy.

Housing

Several planned measures for tenants and house buyers are being debated in the government. For example, Justice Minister Christine Lambrecht (SPD) wants to see that landlords have to pay back excess rent retroactively if they violate the rent brake – a controversial proposal.

There is also a planned reform of the rent index, which will be used to determine how much rent can increased by.

A housing summit is planned to take place on September 21st.

Care crisis

In order to attract more urgently needed nursing staff, the government is planning a whole range of measures. Among other things, care givers should receive better pay and have improved working conditions, according to Health Minister Jens Spahn.

But it could cost up to five billion euros per year and there have not been concrete discussions on where that money could come from. Ordinary people may face higher contributions to pay for it.

Reducing the 'Soli tax'

But there are changes ahead for taxpayers in Germany. Finance Minister Olaf Scholz presented a draft bill last week for approval to other government ministries, which would see 90 percent of taxpayers completely freed of the solidarity contribution from 2021. The tax, known as the “Soli,” amounts to 5.5 percent of income tax and corporation tax.

For 3.5 percent of taxpayers – the top earners – the Soli will still be in place at the current rate. Meanwhile, another 6.5 percent of taxpayers would see their Soli contribution reduced.

The payment, which brought the state €18.9 billion in 2018, was first introduced in 1991 to help cover the costs of reunification and invest in infrastructure in the former East Germany. It was originally meant as a temporary measure but was made permanent in 1995.

A 'Solidary Pact' was then agreed in 2001 in a bid to financially support the eastern German states but that pact expires at the end of this year.

The CDU is pushing to get rid of the tax completely.

Schools and daycare improvement

More than €10 billion of government cash is expected to go to schools and day care centres (Kitas) in the coming years through the “Gute-Kita-Gesetz” (Good Kita Law) and the “Digitalpakt Schule” (School Digital Pact).

All of Germany's states will receive funding to improve the number of day care staff and create better working conditions and longer opening hours (which means more Kita spots) as well as pushing up education quality.

A Kita in Düsseldorf. Photo: DPA

An overview of how eager German schools have been to access and use the funds from the Digital Pact, aimed at upgrading digital equipment, should be available in autumn. The money has been available since May.

Security policy

Should the expiring mandate for the Bundeswehr (German army) mission against the terrorist group Islamic State (IS) in Syria and Iraq be extended? The CDU/CSU and Foreign Minister Heiko Maas (SPD) believe this could be a good idea but SPD faction leader Rolf Mützenich rejected an extension.

A decision is also pending on the future of the arms export ban to Saudi Arabia, which will expire at the end of September.

International headaches

Brexit continues to cause stress for Europe and Germany has upped its preparations for a no-deal amid fears of job losses and uncertainty over the market.

Merkel has invited Boris Johnson to Berlin following his appointment as Prime Minister.

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Output is expected to expand 0.3 percent this year, the economy ministry said, up from a prediction of 0.2 percent in February.

The slightly rosier picture comes after improvements in key indicators — from factory output to business activity — boosted hopes a recovery may be getting under way.

The German economy shrank slightly last year, hit by soaring inflation, a manufacturing slowdown and weakness in trading partners, and has acted as a major drag on the 20-nation eurozone.

But releasing its latest projections, the economy ministry said in a statement there were growing indications of a “turning point”.

“Signs of an economic upturn have increased significantly, especially in recent weeks,” Economy Minister Robert Habeck said at a press conference.

The ministry also cut its forecast for inflation this year to 2.4 percent, from a previous prediction of 2.8 percent, and sees the figure falling below two percent next year.

“The fall in inflation will lead to consumer demand — people have more money in their wallets again, and will spend this money,” said Habeck.

“So purchasing power is increasing, real wages are rising and this will contribute to a domestic economic recovery.”

Energy prices — which surged after Russia’s 2022 invasion of Ukraine — had also fallen and supply chain woes had eased, he added.

Several months ago there had been expectations of a strong rebound in 2024, with forecasts of growth above one percent, but these were dialled back at the start of the year as the economy continued to languish.

‘Germany has fallen behind’

But improving signs have fuelled hopes the lumbering economy — while not about to break into a sprint — may at least be getting back on its feet.

On Wednesday a closely-watched survey from the Ifo institute showed business sentiment rising for a third consecutive month in April, and more strongly than expected.

A key purchasing managers’ index survey this week showed that business activity in Germany had picked up.

And last week the central bank, the Bundesbank, forecast the economy would expand slightly in the first quarter, dodging a recession, after earlier predicting a contraction.

German Economics Minister Robert Habeck

Economics Minister Robert Habeck (Greens) presents the latest economic forecasts at a press conference in Berlin on Wednesday, April 24th. Photo: picture alliance/dpa | Michael Kappeler

Despite the economy’s improving prospects, growth of 0.3 percent is still slower than other developed economies and below past rates, and officials fret it is unlikely to pick up fast in the years ahead.

Habeck has repeatedly stressed solutions are needed for deep-rooted problems facing Germany, from an ageing population to labour shortages and a transition towards greener industries that is moving too slowly.

“Germany has fallen behind other countries in terms of competitiveness,” he said. “We still have a lot to do — we have to roll up our sleeves.”

Already facing turbulence from pandemic-related supply chain woes, the German economy’s problems deepened dramatically when Russia invaded Ukraine and slashed supplies of gas, hitting the country’s crucial manufacturers hard.

While the energy shock has faded, continued weakness in trading partners such as China, widespread strikes in recent months and higher eurozone interest rates have all prolonged the pain.

The European Central Bank has signalled it could start cutting borrowing costs in June, which would boost the eurozone.

But Habeck stressed that care was still needed as, despite the expectations of imminent easing, “tight monetary policy has not yet been lifted.”

In addition, disagreements in Chancellor Olaf Scholz’s three-party ruling coalition are hindering efforts to reignite growth, critics say.

This week the pro-business FDP party, a coalition partner, faced an angry backlash from Scholz’s SPD when it presented a 12-point plan for an “economic turnaround”, including deep cuts to state benefits.

Christian Lindner, the fiscally hawkish FDP finance minister, welcomed signs of “stabilisation” in the economic forecasts but stressed that projected medium-term growth was “too low to sustainably finance our state”.

“There are no arguments for postponing the economic turnaround,” he added.