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Law360 (May 13, 2020, 2:17 PM EDT) -- German Chancellor Angela Merkel said Wednesday that her government has no current plans to raise taxes despite an unprecedented spending plan to help the economy bounce back from COVID-19.
Speaking in the country's Parliament in Berlin, Merkel said the government was taking several measures to cushion the social costs of the pandemic, such as giving aid to businesses and subsidizing shorter working hours. She also noted that restaurants could take advantage of lower taxes when they are allowed to reopen.
Even with those measures, she said, "from the point of view of today, no tax rises are planned."
The comments come as Germany is set to shatter a tradition of balanced budgets so it can pay the costs of shutting down social and economic life to stop the spread of the coronavirus that causes COVID-19. The nation's budget deficit is expected to be around 7% of gross domestic product this year, before moving back into a surplus next year.
Concern about possible tax increases prompted a business association to urge the government this week not to raise taxes.
"Tax increases are poison for the upcoming rebuilding," said the managing director of the BDI business group, Joachim Lang, in a statement Monday.
The group welcomed Merkel's comments in Parliament Wednesday.
"Tax rises are the wrong instrument to drive the economic motor," BDI said on Twitter. "Our businesses now need tax cuts rather than additional burdens."
Germany is one of the more fortunate countries in Europe; in balancing its budget in recent years, it can borrow money on the markets at negative yields. Because investors effectively lose money if they hold German bonds to maturity, the country can borrow as needed.
"There is no need to raise taxes in Germany if we are just talking about the fallout of corona," Christian Odendahl, chief economist at the Center for European Reform, told Law360 on Monday. "Interest rates are so low that even a large increase in public debt — say, 20% of GDP — does not increase Germany's annual spending on interest rates at all."
Germany and many other countries are using the tax system as a way to ensure that businesses and individuals have money as the COVID-19 crisis drastically increases unemployment and forces economies effectively to shut down.
Germany has announced a temporary tax cut for restaurants and Austria on Monday announced a tax cut for nonalcoholic drinks in restaurants and cafes. Germany is also making it easier for companies to claim back tax paid in previous years against expected losses this year, although BDI urged the government to expand that relief.
On the other hand, Saudi Arabia said Monday that it was tripling its value-added tax as a way to raise funds.
--Editing by Robert Rudinger.
For a reprint of this article, please contact reprints@law360.com.
