Germany plans 10 billion euro tax package against inflation

German inflation hit 7.5% in July, fueled mainly by energy prices which soared after Russia invaded Ukraine

Germany will offer tax relief worth 10 billion euros ($10.2 billion) to help workers cope with soaring inflation, Finance Minister Christian Lindner said on Wednesday.

The package will increase the basic non-taxable allowance as well as the level from which the top tax rate of 42% will apply. Families will also benefit from greater tax exemptions for dependent children.

Inflation in Germany hit 7.5% in July, slightly lower than the 7.6% recorded in June, fueled mainly by energy prices which soared after Russia invaded Ukraine .

Lindner said his plan is primarily aimed at tackling the problem of employees who end up with a higher tax burden because they received a pay raise to fight inflation.

As a result, the gain workers received is essentially wiped out by the higher taxes owed.

The phenomenon, called “cold progression,” also generally hits low-income people the hardest.

Lindner said 48 million Germans would face higher taxes from January 2023 if no relief was offered.

“For the state to take advantage of this at a time when everyday life is becoming more expensive…it’s not fair and also dangerous for economic development,” Lindner said.

The tax relief measures come on top of a €30 billion package launched by Chancellor Olaf Scholz earlier this year to help consumers fight inflation.

The previous package included a reduction in fuel tax and a public transport ticket valid throughout Germany at the price of only 9 euros per month for the months of June, July and August.

But it’s clear that the clouds hanging over Europe’s biggest economy are only darkening as the country heads into the colder months.

The conflict in Ukraine has derailed Germany’s hopes of finally getting rid of the coronavirus pandemic and returning to growth.

With its export-oriented industries, Germany has been particularly vulnerable to supply chain bottlenecks and shortages of raw materials caused by the pandemic.

But now the Germans are also watching the barrel of doubling energy bills, after Russia drastically cut its supply following its invasion of Ukraine.

The power crisis is not only eating away at consumers’ purchasing power, but is also hurting German industry, much of which depends on cheap energy supplies to manufacture its exports.

Employees in Europe’s biggest economy are therefore facing the double whammy of rising costs and a growing threat of job losses as big companies consider idling some factories as it is not possible -be more profitable to keep the production lines running.

German growth stagnated in the second quarter of the year, but analysts warned that a recession in the second half would be inevitable.

In their latest forecast in March, economic advisers to the German government estimated that gross domestic product would grow by 1.8% for 2022.

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