The Federal Chancellor has noticed that action must be taken quickly. Olaf Scholz and his traffic light coalition partners want to react to the high prices for gas, electricity and food with a new overall package. These sectors in particular are driving up inflation massively this year. It began in winter, the Russian war of aggression in Ukraine and the lack of gas supplies have accelerated it.
The assumption that inflation has already peaked could prove misleading. Bundesbank President Joachim Nagel is now expecting a two-digit rate of increase in autumn. More than ten percent inflation – that was last in 1951. The only time inflation has come close to the current inflation rate of more than 7 percent was in the early 1990s because of the unity boom, around 1980 and the early 1970s.
A sharp decline in inflation is not in sight for the time being. Nagel expects an inflation rate of another six percent for 2023 – this year it will be around eight percent.
The overall package announced by Scholz should be decided quickly, that has been heard again and again in the past few days. However, government spokesman Steffen Hebestreit said on Sunday that “a few more weeks” would be needed. There is a lot to clarify. The government had previously spoken of “final votes”. Whatever the details look like, it is generally known or can already be seen what is being planned.
The overall package will probably have three parts in terms of effectiveness. Part one has already been brought forward. The reduction in value-added tax on natural gas just announced by the chancellor is an urgent measure to at least somewhat compensate for the massive price hikes here from October 1 – to which the government itself has contributed with its decision to levy a gas levy on the expensive product.
The expiry of the nine-euro ticket and fuel discount at the end of August also contributed to the higher inflation in autumn – higher prices for fuel and local transport could account for around one percentage point. Conversely, however, this shows the great impact these two measures had. There are demands from the SPD and the Greens to extend the nine-euro ticket right now and not just look for a follow-up regulation in the coming year. But the ticket for the state is not cheap: the subsidy cost the federal government three billion euros this summer.
The strongest measure from these packages will come soon: the energy price flat rate of 300 euros will be paid to all employees via the pay slip in September or October. The self-employed and freelancers can claim it on their tax return. Costs for the state: nine billion euros.
The third part of the overall package can already be identified by the announcements from the coalition. These are projects that will take effect from 2023. The SPD has outlined its basic income with possibly higher monthly payments to the needy. A housing benefit reform with a broader group of recipients and a permanent heating cost subsidy is also foreseeable. Finance Minister Christian Lindner (FDP) has presented the cornerstones of an inflation compensation law. A higher child benefit, as demanded by the Greens, could also be found in this package.
But now it’s all about the second part of the overall package. The coalition has come to realize that the measures in the first two relief packages will not be enough. The pressure from outside is growing anyway. Lower Saxony’s Prime Minister Stephan Weil (SPD), who wants to be confirmed in office in the state elections on October 9, calls another relief package “absolutely necessary”. This should consist of measures that take effect quickly and directly in winter. And the focus here is primarily on low earners. This is because they feel inflation the hardest.
According to a calculation by the German Institute for Economic Research (based on the Bundesbank forecast from June, which resulted in annual inflation of 7.1 percent), the bottom ten percent will be burdened with 5.3 percent. In the top tenth, on the other hand, it is only 1.1 percent. In the very broad middle in between, the gross load is between 4.4 percent and 3.4 percent – which means: a little more at the bottom, less at the top.
If you look at the effect of the aid packages, the burden at the very bottom – i.e. for recipients of social benefits – drops significantly to 1.6 percent. This has to do with the fact that they were given direct grants and one-off payments from the first two relief packages. Anyone who receives Hartz IV, basic security in old age or social assistance also gets their heating costs reimbursed. The effect in the broad middle is lower, the burden taking into account the previous measures (i.e. above all fuel discount, nine-euro ticket, energy price flat rate, increased basic tax allowance, early abolition of the EEG surcharge) is 2.7 percent on average .
But now the measures are running out and the heating season is just beginning. Especially in the lower middle, where a relatively high proportion of the income has to be spent on basic needs (up to 70 percent), there is little potential for savings – the reserves are often not high . “For them it’s not just about saving on one or two vacations,” said DGB boss Yasmin Fahimi, referring to those who, according to the unions, need it most now.
A direct payment, such as is now being made with the energy price flat rate, is considered to be particularly effective for the broad middle. It is taxable – which means that low earners have more of the 300 euros net than high earners. The lump sum is distributed to everyone, so the watering can principle applies. But because of the taxation, it works in stages – between 300 euros are paid to everyone who is below the tax limit and 174 euros to those whose salary falls below the top tax rate of 42 percent.
The lump sum has been criticized for not being paid to pensioners and students. At the weekend, Lindner once again made it clear that older people would have benefited from a high pension increase this year. But the SPD and the Greens want to spread a second energy price flat rate more widely. Prime Minister Weil believes that further help is necessary, especially in those areas “that have so far received relatively little support” – not least pensioners and students without additional income. A one-off service in the amount of the first energy price flat rate is urgently recommended, before the end of the year, says Weil.
The argument that, as in the pandemic, aid for affected companies could now also be necessary because of the new crisis, is becoming increasingly common. Because the high gas and electricity prices not only put private households under pressure, but also smaller and larger companies, which cannot pass on the price increases – especially since there are first signs that a partial decline in consumption is now to be expected due to inflation. Lindner said at the weekend that “targeted economic aid is needed in areas where there is a risk of structural disruption due to increased energy and gas prices”.
Weil also has this problem in mind: “The situation in the economy also requires more attention. In many sectors, problems are emerging due to reduced purchasing power,” he said. In addition, there is the tense situation in the energy industry, for example. “Just as in the banking crisis and the pandemic, the federal government must react in good time and prepare support programs,” said Weil. “A strong commitment from the state will also be absolutely necessary in this crisis.”
Lindner had recently hinted that there was actually no more scope in the budget for 2022 for more relief. But now, with a view to a third relief package, he thinks a sum in the low double-digit billion range is possible. Inflation also contributes to this. Because the higher it is, the more the state benefits from increasing sales tax revenue. The reduction in value-added tax for gas is partly financed by the massive increase in income in this area.
From January to July, federal, state and local tax revenues increased by 17 percent compared to the previous year. 2021 was not a good year economically because of the pandemic. But the plus shows that the Ukraine war and the gas crisis have not left such a strong mark on tax revenue. For the year as a whole, the Federal Ministry of Finance is currently expecting a tax increase of 8.2 percent. The sales tax should be 12.9 percent. But whether that’s enough for a larger overall package is unclear. The FDP is urging the debt brake to apply again in 2023. The SPD and the Greens are therefore calling for an excess profit tax for those companies that make larger profits in the crisis. This income should then be used to finance targeted relief. The FDP rejects that, and Scholz doesn’t tend to either.
Green leader Omid Nouripour called for the “company car privilege” to be abolished again at the weekend. According to estimates by the Federal Environment Agency, the state is forgoing income of up to three billion euros with the flat-rate taxation of the private use of company cars – this is a monetary advantage. But the FDP is against it here too.
Green finance politician Sebastian Schäfer is now bringing up a new approach. It starts with Lindner’s Inflation Compensation Act. This is criticized because higher incomes benefit more in absolute terms due to their higher tax burden if the tax rate is adjusted to the price increase. Schäfer proposes compensating for “more significant relief for small and medium-sized incomes” with an additional tariff level for very high earners. Then a new tax bracket would be inserted between the top tax rate of 42 percent (from an income of around 58,600 euros) and the wealthy tax rate, which applies from an income of around 277,000 euros – for example 43.5 percent from 100,000 euros. Alternatively, Schäfer can also imagine setting the tax on the wealthy lower than before. “Since this is only about very high incomes with taxable income in the six-digit range in the single tariff, this would not prevent the center from being relieved,” said the Green politician to the Tagesspiegel.
