Economics professor says Berlin must look at ‘more uncomfortable side’ of how to finance aid package

Germany should consider raising taxes on the wealthiest people to fund its €200bn plan to cap gas and electricity prices, a group of leading economic advisers to the government recommended on Wednesday.

Ulrike Malmendier, one of the five members of Germany’s council of economic experts, said that because the country cannot target its energy support package only at the most needy, it should also “look at the more uncomfortable side” of how to fund it.

“These measures are not super well-targeted because we can’t send cheques to certain households and not others,” said Malmendier, an economics professor at the University of California at Berkeley who joined the council in September, in an interview. “So we could counterbalance this by doing something on where the money comes from.”

She said the council had suggested three ways to tackle this, including raising the top rate of tax, introducing a “solidarity charge” levied on high earners or postponing the government’s plan to reduce tax rates to cushion households from soaring inflation.

The recommendations on tax policy in the council’s annual report are likely to stir intense debate in the ruling coalition, which must give an official response in the next eight weeks.

After parts of the report leaked this week, the idea of higher taxes on the rich was welcomed by officials in chancellor Olaf Scholz’s Social Democrat party and his coalition partners in the Green party. But it was rejected by the third member of the coalition — the liberal FDP — and by the opposition Christian Democrats.

Christian Lindner, finance minister, on Wednesday gave the proposal short shrift. “The government will not raise taxes further,” the FDP leader said, adding that businesses and households are already weighed down by rising prices. “It would be extremely dangerous to increase the tax burden during a period of economic uncertainty.”

The council predicted gross domestic product in the EU’s largest economy would grow 1.7 per cent this year before contracting 0.2 per cent in 2023 — a less gloomy view than the government’s recent forecast and those of many economists. But it warned inflation, which hit 11.6 per cent in the year to October, would stay high — averaging 8 per cent this year and 7.4 per cent in 2023.

The advisers’ recommendations that Berlin should consider keeping the country’s three remaining nuclear power stations running beyond next April and lifting a ban on fracking of shale gas reserves to ease pressure on the electricity market are also likely to divide the coalition.

“We face a new reality on energy supplies and have to accept it is never going to go back to the way it used to be,” said Malmendier. “We might need to think more strongly about sources of energy and minerals we have here in Germany.”

She said the government should consider more subsidies for renewable energy, such as green hydrogen, as well as lifting its ban on fracking to tap into German shale gas reserves, mining its deposits of lithium to boost battery production and extending the life of nuclear plants.

Germany’s three nuclear power stations had been due to be shut at the end of this year. But Scholz announced last month they would keep running for longer to avoid potential blackouts and energy rationing due to a sharp fall in Russian gas supplies following Moscow’s invasion of Ukraine.

The FDP has called for the plants to run until 2024, but the Greens have rejected this because it would force the operators to acquire new fuel rods — a development the environmental party considers unacceptable.

Robert Habeck, the Green vice-chancellor and economy minister, has also rejected recent calls to lift the country’s ban on fracking, which is seen by the FDP as a way to offset lower gas supplies from Russia.

Malmendier said Germany’s economy had undergone “a big break” caused by structural changes in the energy market, geopolitics and demographics. The government should consider making it easier for people to move to the country if offered a job, she said, adding that net immigration of 400,000 a year is needed to avoid a decrease in the workforce, up from 329,000 last year.

Source: http://ft.com

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