German Economists Urge Merkel to Cut Taxes in Her Next Term

German Chancellor Angela Merkel did little for growth during her latest term and should consider tax cuts as she puts together her next government, the country’s leading economic researchers said.

Reducing government debt during Merkel’s third term that began in 2013 was a notable achievement, Stefan Kooths of the Kiel-based Institute for the World Economy told reporters as five leading research organizations presented their fall outlook. With more budget surpluses on the horizon, the next government should focus on lowering social-security taxes and income-tax cuts for earners at the lower end of the scale, he said.

“Economic policy was not very growth-oriented in the past legislative period,” Kooths said in Berlin on Thursday. “The good framework conditions were primarily the result of previous governments, in particular the more flexible labor market. Little was added to that.”

The institutes’ verdict comes as Merkel puts out feelers to potential coalition partners after winning a national election on Sunday amid losses for her Christian Democrat-led bloc. Finance Minister Wolfgang Schaeuble, a Merkel ally who is poised to leave the government, and the Free Democrats, a likely future coalition partner, are calling for tax cuts.

Real gross domestic product in Europe’s biggest economy is forecast to increase to 2 percent next year and grow by 1.8 percent in 2019, compared with 1.9 percent growth this year, according to the report.

Demographic change is “on our doorstep in a concrete way,” Kooths said. “At the beginning of the next decade, average economic growth rates in Germany will be significantly lower than the levels we’ve known,” raising the risk of tension over income distribution, he said.

While the government took pressure off the pension system by making it easier for people to keep working after reaching retirement age, it should take steps to include more women in the workforce, improve the compatibility of family and work, adopt an immigration policy geared to labor market requirements and better integrate migrants, the institutes said.

The group of institutes is led by Kiel’s IfW, Berlin’s DIW, Munich’s Ifo, Halle’s IWH and Essen’s RWI. It presents economic outlooks twice a year.
Source: Bloomberg

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