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ECONOMY

Germany bets on big tax cuts to boost ailing economy

Chancellor Olaf Scholz's government on Tuesday agreed a huge tax relief programme for companies in a bid to revive Germany's sputtering economy.

Pictured are euros.
Photo by CAR GIRL on Unsplash

The package would ease the burden on “small and medium-sized enterprises by around 7 billion euros per year”, the government said in a statement.

While coalition parties have haggled over the extent of the tax cuts in recent months, Germany’s economy has flatlined.

Europe’s largest economy stagnated in the second quarter of 2023, having dipped into recession around the turn of the year.

READ ALSO: Sick man of Europe again? Germany’s economic woes in focus

The slowdown has come as Germany struggled to cope with the impact of the Russian invasion of Ukraine last year, which sent prices for energy and food soaring.

The sluggish growth figures were reason for the German government to go on the “offensive”, Scholz said at a press conference on the first day of a ministerial retreat outside Berlin.

The tax cuts — part of a 10-point plan put forward by the government — were intended to “stimulate growth for our country” and make sure companies made the decision to invest in Germany, Scholz said.

Among the measures agreed were a premium for energy-saving investments, and rule changes to make it easier for companies to write off losses.

‘Turnaround potential’

Recent disappointing data have added to concerns that Germany will drag down the eurozone’s economic performance this year, with the International Monetary Fund predicting it will be the only major advanced economy to shrink in 2023.

“We take it seriously that Germany is growing less dynamically than others,” Finance Minister Christian Lindner said at the press conference.

The country however had a “huge turnaround potential”, which would be unlocked via the targeted relief package, Lindner said.

The pain has been felt particularly acutely in recent months in Germany’s key industrial sector, as exports have plummeted against a backdrop of high inflation and subdued global activity.

Consumer prices rose at a 6.2-percent pace in July — down from last year’s peak but still very elevated.

The post-coronavirus recovery in key trading partner China has meanwhile lost much of its momentum.

With the outlook still gloomy, the government has come under pressure to carry out more thorough reforms to breathe new life into the economy. 

The recent crisis had “deepened structural problems that have existed for a long time”, the influential BDI industry lobby said recently.

Among the concerns raised by business are continuing high energy costs, cumbersome regulations, a lack of skilled labour and a slow shift to a digital economy.

The government sought to address some of these issues in its 10-point plan, which noted efforts to speed up the expansion of renewable energy capacity and steps to reduce bureaucracy.

In June, Germany passed a law easing immigration rules for skilled workers in a bid to counter industry-wide shortages.

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HEALTH

How much more residents in Germany might have to pay for health insurance

People in Germany saw an increase in health insurance costs at the start of the year. It's now expected that they will be hiked up again next year.

How much more residents in Germany might have to pay for health insurance

Health insurance organisations are warning that costs will be hiked up again soon due to concerns over funding. 

Doris Pfeiffer, CEO of the National Association of Statutory Health Insurance Funds (GKV-Spitzenverband), told Germany’s Tagesschau that insurance funds are expecting a billion-euro deficit.

She said it was a tough year “because we don’t have particularly good prospects”.

For people paying statutory health insurance, things could become more expensive next year. Around 90 percent of people in Germany are covered by statutory health insurance.

The contribution rate is fixed by law and stands at 14.6 percent. The additional contribution that the health insurance funds set for their members was raised to 1.7 at the start of this year. 

The latest increase gave statutory insurance funds the ability to charge up to 1.7 percent on top of the standard 14.6 precent contrinution, though not all insurance funds chose to do so.

The costs are split between the employer and employee, so workers in Germany would pay half of any increase. 

READ ALSO: Reader question: How can I change my German health insurance provider?

How much could additional costs rise next year?

Due to the funding issues, health insurers expect an increase of up to 0.6 percentage points to the additional contribution threshold. What this would mean for the insured depends on a few variables such as their income and their insurer.

Someone earning €2,000 gross per month, for example, would have to pay €6 extra per month if their insurer opted to increase additional contributions by this amount. Meanwhile, a gross income of €4,000 would mean €12 extra per month. The employer’s share would be added to this. 

health insurance cards

Many health insurance cards in Germany double as a European Health Insurance Card (EHIC), meaning that they can be used across Europe. Photo: picture alliance/dpa | Jens Kalaene

“That may not sound like much at first glance,” said Pfeiffer. “But there are people who earn very little for whom this is a lot – supermarket cashiers, lorry drivers.”

It comes following a rise in fees at the start of the year. From the start of 2024, additional contributions for statutory health insurance rose by around 0.1 percent in Germany.

Why are costs increasing?

The German healthcare system is one of the most expensive in the world.

As German society ages more, costs continue to rise – and the Covid pandemic didn’t help matters. The National Association of Statutory Health Insurance Funds estimates that this year alone it will cost around €314 billion to provide care for everyone who is insured. 

The money is mainly spent on hospitalisation costs and medical treatment.

READ ALSO: Why long-term care insurance fees are likely to rise in Germany next year

Health Minister Karl Lauterbach (SPD) has so far not presented any concrete proposals on how he intends to relieve the burden on health insurance funds in future.

Instead, the system is likely to face further expenditure. Lauterbach’s hospital reform is expected to drive up costs, while proposals to pay GPs more in order to combat the shortage of doctors would also push up expenses. 

READ ALSO: German ministers greenlight plan to improve healthcare at GPs

Pfeiffer called for a plan to tackle the rising costs.

“We now finally need an approach that puts this healthcare system on a new footing,” she said.

In the coalition government’s initial agreement back in 2021, the parties vowed to support health insurance funds with more tax revenue.

But as difficult budget negotiations take place, it doesn’t look like this will happen. 

This is causing friction among the coalition made up of the Social Democrats (SPD), Greens and Free Democrats (FDP). 

Green budget politician Paula Piechotta, for instance, is unhappy about this.

The opposition CDU/CSU also taken the opportunity to swipe at the government.

“This is not acceptable,” said CDU health politician Sepp Müller. “The tense situation in the social security system cannot continue to be ignored.”

However, it should be noted that there was no plan to help provide more money to statutory health insurance under the previous Health Ministry headed by the CDU’s Jens Spahn. 

When the SPD’s Lauterbach took over in 2021, there was already a funding gap of billions of euros. 

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