Chancellor's Conference: States Call for Financial Compensation
Countries reached investment deal prior to Merz summit encounter
Berlin (dpa) - Today, state leaders gather with Chancellor Friedrich Merz at the Chancellor's Conference, aiming to agree on an investment package to reignite the economy after three years of recession.
Saxony's Minister President, Michael Kretschmer (CDU), believes they share a common goal - to help Germany recover and prosper. "The welfare of our country, states, and municipalities relies on the success of this federal government," Kretschmer said.
Kretschmer expresses optimism concerning the prospect of finding common ground with Merz and Federal Finance Minister Lars Klingbeil on measures to compensate municipalities and states.
Lower Saxony's head of government, Olaf Lies, stresses the importance of federal decisions for enabling the states to approve the project during the July 11 Bundesrat meeting. "I’m confident we'll reach an agreement," Lies, an SPD politician, remarked.
A Matter of Revenue
The Bundestag is set to vote on an economic stimulus program next Thursday. The plan aims at jump-starting the lackluster economy by offering incentives for investments in the form of extended tax depreciation options for equipment and electric vehicles. From 2028, the proposed corporate tax rate will also decrease.
However, these plans could lead to substantial revenue losses for federal, state, and municipal governments due to lowered taxes. The proposed loss amounts to 13.5 billion euros for municipalities, 16.6 billion euros for states, and 18.3 billion euros for the federal government, totaling around 48 billion euros.
States have requested financial compensation from the federal government, particularly since many troubled municipalities face a severe financial crisis.
Shifting Gears
Ensuring that funds from the fiscal package support additional investment rather than consumption or budget shifts is of utmost importance to the states. There's a significant risk of up to 1.2% of GDP being cross-financed instead of genuine new investments, which could undermine the package’s long-term growth effects.
The fiscal package's compatibility with EU fiscal rules hinges on a strong investment focus and accompanying structural reforms, as highlighted by states and economic experts.
Besides tax incentives, the package includes a €500 billion infrastructure fund to finance transport, energy, and digital infrastructure over 12 years, aiming to boost GDP by about 2.5% by 2035. The financing of this fund outside the traditional debt brake might impact state budgets and federal-state financial relations.
Finance ministers in Germany are set to discuss the potential financial compensation for states, as they are expected to face substantial revenue losses due to an economic stimulus program that offers tax incentives for investments. The states have requested this compensation, particularly considering that many municipalities are facing a severe financial crisis.
The compatibility of the fiscal package with EU fiscal rules depends on a strong focus on investment and accompanying structural reforms. Additionally, the package includes a €500 billion infrastructure fund that will impact state budgets and federal-state financial relations, as it is financed outside the traditional debt brake. These financial discussions are taking place at the Chancellor's Conference, where state leaders are gathering with Chancellor Friedrich Merz to agree on an investment package for the economy.
