With Tax Revenues High, German Politicians Debate How to Spend the Money

This year's election could herald a bonanza for German consumers.

With the country's coffers overflowing, the competing candidates are brimming with ideas about how to spend the money--or how much of it to give back.

Tax revenue estimates released on Thursday showed the strong economy and labor market would deliver a EUR54.1 billion ($58.7 billion) windfall through 2021, underlining the firepower at politicians' disposal. If they deliver on their pledges, this could be good news for the U.S., the EU and the international organizations that have been urging Germany to loosen its purse strings for years.

In a sharp departure from past elections, the candidates in September's election have lined up spending proposals--from free child care to higher unemployment benefits and infrastructure investment--and tax cuts that could bring German voters tens of billions of euros extra per year, economists say.

"The sky appears to be the only limit," said Holger Schäfer, economist with the business-funded IW economic institute.

For years, Germany ignored calls from the U.S., the International Monetary Fund and the European Commission to spend more as a way to reduce its large current account and trade surpluses and help the embattled economies of its eurozone neighbors.

While Germany's change of mind comes late, economists say it could give a welcome fillip to the budding recovery in the euro area. More domestic spending would mean more internal demand, with positive spillover effects for neighboring economies, they have argued.

It could also go some way to defusing criticism of Germany in France, where many politicians, including President-elect Emmanuel Macron, have called for more expansionary economic policies in Berlin to help the rest of the region.

The European Commission predicted in its spring forecasts on Thursday that Germany's current-account surplus would ease to 7.6% of GDP in 2018 from 8.5% of GDP in 2016, helped by a rebound in investment and rising imports.

Extravagant campaign pledges are the stuff of democracy, but they haven't been a dominant feature of German elections for almost two decades, as politicians stressed the need to save money and repay ballooning public debts.

In the first decade of the century, the government took an axe to the welfare state, slashing benefits and entitlements. Since then, Chancellor Angela Merkel has raised pensions for some people but otherwise maintained the status quo. And German taxpayers and businesses haven't seen substantial tax cuts since the mid-2000s.

But with healthy growth, near-full employment, and now three years of budget surpluses, priorities are shifting.

Finance Minister Wolfgang Schäuble on Thursday announced a rise in the government's country-wide tax revenue estimate that he said created leeway for tax cuts. His ministry expects the budget to remain in surplus at least until 2018 after last year's record EUR24 billion profit, and the country's public debt, which has been shrinking for the past five years, is set to fall below 60% of GDP by 2020.

Leading the competition for spending ideas are the center-left Social Democrats, now junior partners in Ms. Merkel's ruling coalition. The party has promised more funding for training and education, infrastructure investments and child care as well as cuts in health insurance contributions. Economists put the combined stimulus at EUR30 billion a year.

Ms. Merkel's conservative bloc has suggested grants for home buyers with children and reducing and eventually abolishing nursery fees. It also wants EUR15 billion a year in tax cuts for small- and medium-income earners, and Mr. Schäuble has said Berlin may have to react to mooted corporate tax cuts in the U.S. and the U.K.

In the opposition, the pro-business Free Democrats want to cut taxes by EUR30 billion a year. Others, including the anti-establishment AfD and the Left Party, want to focus spending on families, from one-off cash benefits for newborns to free day care and a near doubling in child benefits. The Greens have said they would earmark an extra EUR12 billion for families on low incomes and single parents.

Unlike the possible tax cuts, the promised benefits boost received a mixed welcome from German economists, many of whom say Germany already spends too much on welfare--some EUR888.2 billion, or 29.4% of its gross domestic product, in 2015, and one in two euros in the federal budget.

"They can spend a euro only once...and if they really cut taxes and provide more benefits I expect them not to cut spending elsewhere but to simply increase debt," said Niklas Potrafke from the Ifo economic institute.

Still, pollsters say this year's avalanche of new spending ideas is tapping into a diffuse but mounting resentment among voters at a perception that the rich are getting richer and small- and middle-income Germans are missing out.

"Social disparity has become the number two concern [behind the integration of refugees], but only because we don't have other problems right now," said Matthias Jung, head of the polling institute Forschungsgruppe Wahlen.

(END) Dow Jones Newswires

May 11, 2017 09:30 ET (13:30 GMT)