Who's Left Out in the Economic Game? Merz Embraces the Federal States, Hoping for a Big Victory
Federal States Backed by Merz, Boasting High Expectations for Achievement
By Volker Petersen
In the name of economic stimulation and business relief, the federal government is ready to slash taxes by 48 billion euros over the next several years. However, this move leaves states and municipalities stranded, with a total loss of 13.5 billion euros from their pockets. Merz takes a calculated approach that might stir up some controversy.
Economic revitalization is one of the top three key goals Federal Chancellor Friedrich Merz has set for himself. The others: limiting immigration and aiding Ukraine. His government has already introduced a bill aimed at providing relief to businesses, accompanied by an estimated cost: 48 billion euros by 2029 - a substantial amount, almost equivalent to Germany's annual defense spending - without special funds.
The state's overall budget must bear this loss, but it is distributed between the federal government, the states, and the cities and municipalities. The federal government allots 18.3 billion, the states 16.6, and the municipalities 13.5 billion. At first glance, this division may seem fair, given the saying, "everyone carries their own burden." However, in reality, it would be a significant burden for the states and municipalities. Several state budgets already struggle, and few cities and municipalities still boast a balanced budget. Even in prosperous Baden-Württemberg, it's only 20%. It's simply impossible to somehow save a few billion here and there at short notice.
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One might have expected the minister-presidents of the states to head to Berlin for the minister-presidential conference with a troubled look and clenched fists. There, they met Merz, fresh from the world stage at the G7 summit in Canada. He had just helped save the world, if only for a while. But now, the municipal finances were in dire straits, at least as challenging as the topic that had awaited him. More or less directly from the plane, he went straight to the Bundesrat to speak with the heads of the governments of the states. It was his first meeting as Chancellor and, incidentally, also a test of a question many had asked before his term: Can he even be Chancellor?
Short answer: Yes, apparently so. The press conference with the Lower Saxony Minister-President Olaf Lies as the representative of the SPD states and Michael Kretschmer from Saxony for the Union side was surprisingly cordial. At least in terms of the issue at hand. It was hardly surprising that neither Kretschmer nor Merz would argue openly on stage. Even the Lower Saxon Lies expressed himself very positively.
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Merz thanked both for "excellent federal cooperation" and said that they stood united before great tasks. "There are distribution conflicts between the federal government, the states, and the municipalities," he admitted. But: "That's completely normal in the federal state structure of the Federal Republic of Germany." He said they had "naturally" taken into account the "special financial challenges of the states and municipalities." A joint effort, dialogue, and demonstrating unity were essential. Merz asserted that there was considerable public hope that now had to be channeled into laws.
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The deadline is set for July 11
The key to harmony was Merz's concession to offer an offset to the states and particularly to the municipalities. A test of the demonstrative unity of the federal and state governments will be how high this offset will be. A working group will advise on this. Next week, the Bundestag should decide on the package, and on July 11, the Bundesrat. If everything goes smoothly, a mediation committee will not be necessary.
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This harmony would be a significant achievement and in no way a given. Merz has apparently managed to bring the federal and state governments together on a common goal and present a solution. Of course, he also covered substantial ground to reach them. However, his government can thereby fulfill an essential election promise even before the summer break. This mirrors the leadership style that his predecessor always spoke of. The words of Kretschmer and Lies went far beyond mere lip service. The tone was different than in the times of the traffic light coalition, when in similar conflicts, each side seemed to only see its own advantage. The squabbling and fighting for the big money appears to be a thing of the past.
Enrichment Data:
Overall:
In the distribution of the 48 billion euros for corporate tax cuts, Germany’s states and municipalities are likely to face reduced revenues and constrained budgets that impact their fiscal capacity.
Federal Government, States, and Municipalities Budget Impact
- The German federal government plans a tax relief package around 46-48 billion euros aimed at stimulating the economy from 2025 to 2029, primarily benefiting companies and aiming for economic revitalization after contraction in previous years [1]. This implies a reduction in federal tax income, which also affects subnational entities’ revenue sources.
- States and municipalities in Germany depend significantly on tax revenues delegated from or shared with the federal government. This large-scale tax relief implies less money flowing down from the federal level to these subnational entities, potentially forcing them to adjust their spending or find alternative revenue sources.
Economic Context and Fiscal Measures
- Ifo institute forecasts indicate that the corporate tax cuts could boost the German economy by approximately 10 billion euros in 2025 and 57 billion euros in 2026, contributing to slight GDP growth improvements in 2025 and 2026 (0.1 and 0.7 percentage points respectively) [1]. This economic growth could potentially offset some immediate revenue shortfalls for states and municipalities. However, the search results provide no explicit breakdown showing direct compensatory measures for subnational entities.
Summary
The 48 billion euro tax cut package primarily reduces federal tax revenue, impacting the budgets of states and municipalities. This could force these entities to adjust their spending or find alternative revenue sources unless supplemented by federal transfers or stronger economic growth [1].
- The Commission, the Council, and the European Parliament must address the policy-and-legislation surrounding the financial impact of the tax relief package on the states and municipalities in Germany.
- Businesses are set to benefit from the proposed finance policy of the federal government, but the general-news reveals that the policy may burden states and municipalities, threatening their budgets and financial stability.
- Politics in Germany are escalating as the federal government, the states, and the municipalities negotiate over the distribution of funds, with the European Parliament keeping a close eye on the process and its implications for businesses and the overall economy.
