Germany’s Tax Income to Tumble $106 Billion on Virus Fallout (2)

Germany projected that tax revenue will fall sharply due to the fallout from the coronavirus crisis, raising questions about how much debt the government will be willing to take on to revive Europe’s largest economy.

With factories, restaurants and shops forced to shut to contain the disease, Germany’s overall tax income for 2020 is expected to be 98.6 billion euros ($106 billion) lower than an estimate six months ago, the Finance Ministry said on Thursday. The estimates assume a 6.3% contraction this year.

The federal government’s 2020 shortfall is projected at 44 billion euros, with states and municipalities also taking a hit. The crisis will burden Germany’s finances for years to come, with the decline in federal tax receipts totaling 171 billion euros through 2024.

The drop in revenue puts Germany under pressure to borrow heavily to finance a stimulus plan due to be presented in early June. Chancellor Angela Merkel has described the crisis as the country’s biggest challenge since World War II, requiring a reconstruction plan of historic proportions.

“Thanks to the good budget policy of recent years, the corona crisis can be managed financially,” Finance Minister Olaf Scholz said. “The next step is to take targeted measures to get the economy going again,” with the impact starting this year.

Read more: Nosediving German Economy Isn’t Just Suffering Amid Virus

But colleagues in Merkel’s Christian Democratic party have signaled resistance to aggressive borrowing, arguing that the dramatic decline in tax revenue means some demands will have to go unmet.

“Not every wish makes sense and can be fulfilled,” said Eckhardt Rehberg, budget spokesman for the chancellor’s conservative bloc. “The federal budget cannot support everything. Ultimately, all debts will eventually have to be paid off by future generations.”

‘Bazooka’ Spending

The fallout from the pandemic has forced Merkel’s administration to abandon a policy of running balanced budgets, mobilizing some 1.2 trillion euros to support German businesses. The government expects national output to suffer a steeper contraction than during the financial crisis a decade ago.

In March, Germany set aside constitutional debt limits to finance the initial “bazooka” rescue package, with 156 billion euros of new borrowing. Scholz has insisted that after years of budget surpluses, the government has the resources to help the economy.

“What we started with the bazooka is the exact opposite of a savings program,” said Scholz. “You cannot save up against a crisis, this would be a mistake.”

While Germany has slowed the spread of the virus and is pushing ahead with a broad restart of public life, the fallout continues to disrupt economies around the world, affecting the country’s export-led businesses.

Germany’s industrial sector projects a revenue drop of 24% on average this year, as slumping demand prompts the country’s manufacturers to seek state wage support for more than 2 million workers, according to a survey of 1,402 companies by Gesamtmetall.

The employers’ group urged the government to implement a program to stimulate demand, including incentives for car purchases, Managing Director Oliver Zander said in a briefing with reporters.

Scholz and his Social Democratic Party are also seeking to help struggling local governments. Already burdened by debt before the crisis, they will be particularly hard hit by a drop in commercial tax revenue, their main source of income.

“A stimulus program in early June will bring new momentum and new growth,” said Scholz. “Investments in our country, in maintaining the social fabric and in a modern and climate friendly future will be the guiding principles for that.”

(Updates with finance minister, lawmaker comments)

--With assistance from Raymond Colitt.

To contact the reporter on this story:
Birgit Jennen in Berlin at bjennen1@bloomberg.net

To contact the editors responsible for this story:
Chad Thomas at cthomas16@bloomberg.net

Chris Reiter, Daniel Schaefer

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