German coalition parties agree €130bn package to get country back on track

German Chancellor Angela Merkel and German Finance Minister and Vice-Chancellor Olaf Scholz arrive to address a news conference.

Chancellor Angela Merkel’s ruling coalition on Wednesday agreed a bumper stimulus package to speed up Germany’s recovery from the coronavirus.

Speaking at a news conference after marathon talks that extended well into the night, Merkel said the package would amount to €130 billion ($146 billion) and include lower value-added tax (VAT) to boost consumption.

“The size of the package will amount to €130 billion for the years 2020/2021, €120 billion of which will be spent by the federal government,” Merkel said. “So we have an economic stimulus package, a package for the future.”

The stimulus programme follows a 750 billion-euro rescue package agreed in March which encompassed a debt-financed supplementary budget of €156 billion.

Germany’s measures, which together with liquidity aid and loan guarantees equal more than 30% of its economic output, go substantially beyond any other national emergency programmes launched by other euro zone countries.

Merkel said VAT will be reduced from 19% to 16% for six months starting in 1 July. The reduced valued-added tax rate, which applies for some products such as food, is cut to 5% from 7% over the same period. The overall cost of the VAT measures amount to €20 billion.

Finance Minister Olaf Scholz said the package will be partly financed by additional net new borrowing. Some €60 billion of the €156 billion in new debt approved in March have not been tapped, he added.

Germany can afford generous spending splurges given it had a balanced budget since 2014 and had a debt to output ratio of 60% before the pandemic, well below euro zone partners like Italy, Spain and France.

“We can do this because we economised well in recent years,” said Scholz. “We want to come out of this crisis with vigour.”

The package also includes at least €10 billion a year to help municipalities struggling with lower tax receipts with public spending on infrastructure and housing.

The sheer scale of Germany’s new spending splurge has raised concerns among officials from economically weaker countries that the discrepancy in aid measures could worsen imbalances in the bloc and distort the European Union’s single market.

The measures also include a one-time, €300 stipend per child to help families as well as a doubling of incentives to promote the sale of electric cars.

Germany has weathered the crisis better than many of its European neighbours.

Widespread testing, a robust healthcare system and restrictive measures have helped it keep deaths relatively low. The economic impact of the crisis has also been cushioned by a decision to keep factories and construction sites open as well as generous government financial assistance to businesses and freelancers.

The economy is expected to shrink by 6.3% this year, sinking into its worst recession since World War Two.

In a concession to the SPD, Merkel’s conservatives dropped demands for cash incentives to promote the sale of combustion engine cars. The SPD appeared to have partly given up on a 57 billion-euro package to help municipalities, especially those with high debt.

Below are the facts and figures on the main measures:

PUSH FOR CONSUMPTION

- Valued-added tax is reduced temporarily from 1 July until 31 December to 16% from 19% for all goods, including cars. The reduced valued-added tax rate, which applies for some products such as food, is cut to 5% from 7%. This costs €20 billion.

- Parents will get a cash handout of €300 per child. This costs €4.3 billion euros.

SOCIAL SECURITY

- The government stabilises the social security system, which includes public health care and unemployment aid, with a cash injection of €5.3 billion in 2020 and additional funds in 2021. This helps both companies and employees by keeping their social contributions below the 40% threshold of income.

LOWER ENERGY PRICES

- The government lowers the renewable energy surcharge and with it the electricity bill in 2021 and 2022. This costs €11 billion for both years combined.

TAX RELIEF

- The package includes several tax-relief measures for companies such as an expansion of tax loss carry-forwards and degressive depreciation for investments. This costs federal and state governments €8 billion.

AID FOR SMALL COMPANIES

- To ensure the survival of small- and medium-sized companies, up to €25 billion are made available from June to August to make up for virus-related losses of sales. The aid will be financed with unused funds from the first rescue package agreed in March.

HELP FOR CULTURAL AND NON-PROFIT ORGANISATIONS

- The government makes available €1.9 billion to help cultural and non-profit organisations survive the virus-related closures of theatre, cinemas, operas and other institutions.

STRUGGLING TOWNS

- The government will help municipalities by shouldering a larger part of housing costs for the unemployed and by compensating for a plunge in local trade tax revenues. This will cost the federal government some €10 billion.

SCHOOLING AND DAY CARE

- The 16 state governments will get €3 billion to improve and expand kindergartens and other day-care facilities as well as full-time day schools.

E-CARS AND CHARGING STATIONS

- The government doubles its share of the existing purchase incentive for electric cars and hybrid cars. This means Berlin now pays a grant of €6,000 for a purely electric car. In addition, car manufacturers grant a subsidy of 3,000 euros. The measure applies for cars worth up to €40,000.

- The motor vehicle tax is also being reformed so that owners of gas guzzlers such as SUVs will pay higher taxes. From January 2021, owners of cars with emissions of more than 95 grams of CO2 will gradually pay more taxes.

- To further boost e-mobility, existing programs to build charging stations and support battery cell production are expanded by €2.5 billion.

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