Regardless of whether the CDU forms a coalition with the SPD or the Greens after the elections, Germany finds itself in a completely different situation than in 2009, when one of the biggest concerns was the debt-to-GDP ratio, which then stood at about 80 percent. In this year’s German elections, alongside the issues of migration, the economy is of paramount importance. Low economic growth, mass layoffs in industry, disputes over allowing a larger budget deficit, and problems related to bureaucracy and digitalization mark the current landscape. Will the likely new Chancellor, Merz, be the one to set the economy of Germany’s western neighbor back on the right track?
After four years of a turbulent “traffic light” coalition (comprising the Social Democratic Party of Germany, the liberal FDP, and the Greens), which ended prematurely due to disputes over economic and fiscal policy, including the legitimacy of increasing the budget deficit, Germany is forecasted to achieve a mere 0.3% GDP growth this year according to government predictions. A significant factor contributing to this situation is the state of the automotive industry, where rising energy prices post-Russian invasion of Ukraine and competition from Chinese manufacturers have led to an increase in unemployment, which the Federal Employment Agency reports may rise to 6.4% by January 2025, the highest level since the COVID-19 pandemic.
The press reports planned long-term layoffs at companies such as Porsche (2,000), Continental (3,000), Ford (3,000), Bosch (8,000), Thyssenkrupp (11,000), and Volkswagen (35,000). In addition, despite the current Chancellor Olaf Scholz’s promises, bureaucracy and insufficient digitalization remain, according to the Ifo Institute, a significant issue for enterprises, generating costs of 145 billion euros for the German economy.
Given the upcoming elections, it is worthwhile to analyze the programs of the parties likely to enter the Bundestag for the 21st legislature, especially the CDU/CSU, SPD, Greens, and AfD.
“Policy Change for Germany”
The election program of the Christian Democratic Union (CDU) identifies high taxation, bureaucracy, and deindustrialization as the sources of Germany’s economic problems. The CDU aims to index tax thresholds to inflation, increase the tax-free allowance, reduce the corporate income tax to 25%, exempt overtime pay from taxation, and abolish the 5.5% solidarity surcharge.
Bureaucracy is set to be reduced through measures including the introduction of a rule to remove two regulations for every new one added, diminishing ESG reporting regulations, ensuring regulations do not exceed European Union directives, and shortening the retention period for accounting documents from eight to five years. The situation in industry is expected to improve through the lowering of the electricity tax, broadening deductions for investments in green technologies, and allocating 3.5% of GDP to research and development by 2030. Additionally, the weekly working time will be calculated as opposed to daily.
The CDU also declares its opposition to significant changes in the so-called “debt brake”, which allows for a budget deficit only up to 0.35% of GDP, as introduced in 2009. This provision aimed to reduce debt, with exceptions available only for natural disasters and other extraordinary circumstances. The current framework has faced criticism from the International Monetary Fund, the Bundesbank (notably, the current president, Joachim Nagel, is a member of the SPD), and even from former Chancellor Angela Merkel.
According to the Centre for European Economic Research (Zentrum für Europäische Wirtschaftsforschung), the positive effects of implementing the CDU’s program would be felt more by wealthier individuals than poorer ones, with a fiscal cost for the budget estimated at 47 billion euros. It is important to note that not all proposals were analyzed, with a focus mainly on tax and social policy in the calculations.
“More for You. Better for Germany”
The Social Democratic Party (SPD) combines economic growth with social justice. The industrial situation is expected to improve through tax deductions for purchasing electric vehicles, the establishment of a 100 billion euro German Fund (Deutschlandfonds) to support public and private capital in energy, infrastructure, and housing investments. The SPD plans to create a “Made in Germany” program, which intends to replace complicated grant schemes with tax returns for company investments and introduce tax breaks for partnerships reinvesting profits.
The SPD emphasizes the necessity of reforming constitutional budget rules to increase public investment. It plans to increase inheritance and gift taxes, introduce a wealth tax and a financial transaction tax, raise the minimum wage to €15 per hour by 2026, and maintain the solidarity surcharge.
According to the Centre for European Economic Research, a significant majority of Germans would benefit from implementing the SPD’s proposals, with budget revenues increasing by €1 billion.
“Growing Together”
The Greens propose lowering the electricity tax, reforming constitutional budget rules, and establishing the German Fund to finance public investments in railway infrastructure, education, scientific research, support for enterprises, a five-year investment premium of 10% (deductible from corporate tax liabilities), and allocating over 3.5% of GDP for scientific endeavors.
The solidarity surcharge is to be eliminated, while taxes on the wealthiest will increase, and the tax-free allowance will be raised to €12,500. According to ZEW, for the reform to be neutral for the state budget, the current 42% rate for earners above €73,000 would need to increase to 46.5%, in addition to creating a new 48% bracket for taxpayers earning €100,000 to €250,000, and raising the highest rate from 45% to 50%.
The lowest earners are proposed to receive compensations for the costs of carbon emission fees. The Greens also support a minimum wage of €15 per hour.
According to calculations from the Centre for European Economic Research, implementing the Greens’ proposals, like those of the SPD, would be beneficial for the vast majority of Germans, with tax revenues being €3 billion higher compared to the SPD program.
“Time for Germany”
The Alternative for Germany (AfD) initially focused on opposing the financial bailout package for Greece during the eurozone crisis. Currently, it is associated with opposition to the presence of migrants in Germany. However, regarding economic policy, it has not lost its conservative-liberal roots. The AfD supports the abolition of the solidarity surcharge, property tax, and inheritance tax, as well as adjusting tax thresholds for inflation and increasing the tax-free allowance to €15,000. It also proposes introducing an additional tax deduction for retirees to encourage them to stay in the workforce and promoting individual retirement plans through tax incentives. The party opposes changes to budget rules, sees salvation for industry in lowering energy taxation, and wants to abolish carbon emissions charges while reducing bureaucratic formalities, including ESG reporting and opposing the planned EU ban on the sale of fossil fuel vehicles.
According to the Centre for European Economic Research, the main beneficiaries of these reforms would be the middle and upper classes, with an estimated fiscal cost of €97 billion. Co-chair of the AfD, Alice Weidel, criticized ZEW’s findings, ambiguously mentioning the omission of important programmatic issues and accusing the research institute of links to the SPD.
Leftist aspirations for change, Germany deserving more, or can “everything be changed”? In conclusion, briefly about the far-left Die Linke and Sahra Wagenknecht’s Alliance (BSW). The main difference between them lies in Wagenknecht’s overt pro-Russian stance and her opposition to immigrants. Die Linke is the most pro-immigrant party in the Bundestag.
Die Linke advocates a minimum wage of €15 per hour, increasing the tax-free allowance to €16,800, raising the highest income tax rate to 53%, and a wealth tax along with a 0.1% financial transaction tax. They also call for increasing corporate tax rates to 25% and propose surveillance of energy prices, aligning the taxation of capital gains with labor income, abolishing budget rules, and establishing a €20 billion safety fund for the automotive industry.
On the other hand, Sahra Wagenknecht’s Alliance supports raising the tax-free allowance, setting the minimum wage at €15 per hour, aligning the taxation of capital income with labor income, introducing a wealth tax, and increasing spending on research and development to 4% of GDP by 2030. The party seeks to reform fiscal rules and opposes the planned ban on fossil fuel engines. They also advocate for reducing bureaucratic formalities related to ESG.
At the opposite end of the spectrum is the FDP, which supports increasing the tax-free allowance, raising the threshold for the 42% tax rate from €68,000 to €96,000, indexing tax thresholds for inflation, abolishing the solidarity surcharge, and lowering the corporate income tax. The FDP proposes a weekly, rather than daily, assessment of work hours and shortening the retention of accounting documents to five years. They are against extending EU regulations beyond the required minimum, oppose changes to fiscal rules, the wealth tax, and the ban on fossil fuel engines, and emphasize digitalization.
According to analysis from the Centre for European Economic Research, the outcomes of implementing the BSW program would be at a similar level as the SPD and Greens proposals; in contrast, Die Linke and FDP results differ significantly. While the lowest earners would gain considerably under Die Linke, the wealthiest would face significant tax increases. In the case of the FDP, wealthier segments of society would benefit the most, while the poorest would gain little, and some groups, such as families with children, might even lose out due to proposed changes in social benefits. The liberals criticized ZEW for misinterpreting the proposal on social benefit consolidation and not considering potential economic growth. On a fiscal level, the budget under the FDP proposals would show a loss of €116 billion, while BSW’s ideas would yield €4 billion gains, and Die Linke’s proposals would gain €46 billion.
Conclusion
Regardless of whether the CDU forms a coalition with the SPD or the Greens after the elections, Germany is in a completely different position compared to 2009, when the debt-to-GDP ratio was one of the biggest concerns at around 80%. A left-wing partner, in the name of stimulating the economy, will likely not favor adherence to fiscal rules. Moreover, the CDU promises tax cuts, making both the option of allowing for greater debt and, alternatively, increasing taxation politically costly—potentially to the benefit of the AfD.
Stanisław Stasiura
The author is a parliamentarian of the Youth Parliament of the Republic of Poland of the VII term and a member of the Polish Economic Society.
Source: https://managerplus.pl/wybory-w-niemczech-kto-naprawi-niemiecka-maszyne-31532
