Insights
German Coalition Agreement update
While the German parliament passed legislation, with a supermajority, to ease the debt brake for defence spending and initiate a EUR500bn “Sondervermögen” to invest in infrastructure, the negotiations between SPD and CDU/CSU have been since challenging, especially on topics such as taxes and migration. For instance, on taxes, the SPD was, according to press reports, more reluctant to lower corporate rates and wanted to further increase income taxes for higher incomes, as well as introducing a wealth tax.
Business friendly
Overall, we are positively surprised by the agreement, but two main caveats should be made. First, while the coalition agreement represents a roadmap of the incoming government, it is not certain that all these intentions will be realized. Second, while CDU/CSU approval of the deal is a given, this is not the case for the SPD. SPD members will need to vote on the deal and, while this will likely be granted, it is not a certainty.
Positive aspects of the deal include tax relief with accelerated depreciation on capital expenditures – labelled an “investment booster” by the coalition partners – followed by a period of the corporate tax rate reducing by one percentage point a year, in five steps, from 2028.
In addition, the coalition will set out to achieve ambitious cost-cutting targets, aiming for EUR 10 billion savings from public administration and EUR 16 billion reduced implied bureaucracy costs for corporates. These measures should provide a favourable environment for long-term investment planning, and reflect the new government’s business friendly approach.
On infrastructure, the substantial EUR 500 billion spending plan includes 100 billion for climate initiatives and the same again to address local requirements. The remaining 300 billion is expected to be front loaded, with 150 billion planned to be utilized between 2025 and 2029. While the incoming government has suggested a x3 GDP multiplier effect from this infrastructure spending, there is some danger of a crowding out effect that leads to a less favourable multiplier.
In terms of other spending, the current pensions level will be guaranteed until 2031, while a new scheme will support saving plans for children aged six to 18. The coalition agreement pledges no tax rises for higher earners, omits any mention of a wealth tax, while also making some vague statements about lower taxes for those on middle and low incomes.
An improving outlook
Alongside the recent relaxation of Germany’s strict debt rules, the coalition agreement represents a positive first step to turning round the fortunes of Germany’s ailing economy, and we hope the incoming administration continues to take measures to make the environment more attractive to business. While the agreement is, of course, just a start and both parties must now work towards delivering these promises, the medium-term outlook for the Germany economy has certainly now improved.
