Tax cuts back on agenda in Germany.

Angela Merkel of the Christian Democrats looks set to continue as Chancellor in Germany following elections. However the Social Democracts have lost their position as government coalition partner and in doing so the baton has been passed to the smaller anti-socialist pro-market Free Democratic Party. This strengthens the hand of Merkel to deliver on promised tax cuts as well as labour market reforms. Given the size of the German economy this could be good for tax competition across the entire European Union. Germany should be well worth watching over the coming months.

10 thoughts on “Tax cuts back on agenda in Germany.

  1. Interesting. The Free Democrats won big which put the socialists out of the government coalition. It seems from the results that the country made a lurch rightward because even Merkal’s party lost a few points.

    So now we have ( or are about to have with the UK on 2010 and Spain following on) a right wing EU. Germany, France, Italy, UK and Spain all having right wing relatively pro market governments in 2010 across the big EU economies.

    This is an interesting state of affairs.

  2. Given the general amount of anti-capitalist rhetoric associated with the GFC is is extra interesting.

  3. I suppose people are getting desperate, and seeing the socialists continually fail them they are willing to try something new. My girlfriend is half German and was disappointed to find that the Free Democrats were using sex to win votes, though was happy that the low voter turnout probably meant that only people who gave a shit came out for the day

  4. Germany, France, Italy, UK and Spain all having right wing relatively pro market governments in 2010 across the big EU economies

    Steady there big boy. Right wing pro-market in Europe does not exactly mean animal spirits doing their thing. It’s just a slight loosening of the collar. By their standard, the ALP could qualify.

    You can add Sweden to the list, by the way.

  5. David:

    I think my hunch is correct about them. For instance I have no doubt that in Berlusconi in his first term would have lowered taxes.I think that Sarkosy would also have done the same.

    The problem has always been EU requirements and the fact that one individual country can’t unilaterally move without the others otherwise the potential temporary deficit would rise above the ceiling and cause all sorts of treaty complications.

    I think there is more of chance now with the advent of a right ward leaning EU of seeing something meaningful developing.

  6. JC,

    I don’t quite understand your point. Surely the deficit cap still applies even if everybody is cutting taxes. The way to accomodate this is to cut government spending or pass other complimentary reforms that accelerate investment and growth. To be sure if all of the EU is cutting taxes the growth benefit will be bigger but a solo effort isn’t precluded by the existing rules. Unless I’m missing something.

  7. Terge:

    The real fly in the ointment getting the deficit ceiling temporarily removed is Germany as they control the shots.

    I’m just guessing here, but over the next few months we’ll begin hearing that Germany would be okay with a temporary rise in the ceiling as they all do their tax thing.

    The other problem with going it alone was the issue of the one currency when some of the impact could be taken through the individual currency adjustments.

  8. There’s no way they can cut spending in real terms. It’s just politically impossible. They can of course retard spending.

  9. Retarding spending is way under rated. At normal rates of economic growth we can deliver quite massive reductions in tax rates. As outlined on this blog previously if we froze real per capita spending in Australia for just a decade we could halve income tax rates across the board. That’s quite a radical reform to taxation with a quite modest impact on government services. Coupled with prudent cost cutting quite small government by todays standards is very much achievable. Of course all this assumes political will exists.

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