Via Financial Times

The coronavirus crisis has blown a hole in Germany’s public finances, with this year’s tax take expected to fall by €81.5bn compared to 2019 — a 10 per cent decline.

The latest figures reveal the extent of the havoc restrictions implemented to combat the spread of Covid-19 will wreak on the budget of the eurozone’s largest economy, amid a steep slump in economic activity.

While it is expected to fare better than many eurozone members, Germany is heading for the worst recession in its postwar history, with GDP set to shrink 6.3 per cent this year, officials say.

Further strains on the country’s budget will emerge next month when the government unveils a sweeping fiscal stimulus to boost the economy as it eases quarantining restrictions for businesses.

Olaf Scholz, finance minister, said that after deploying public funds to help workers and companies, “the next step will be to reinvigorate the economy with targeted measures, so that industry, trade and commerce can get back into gear as [the shutdown] is eased,” he said.

Last November, the government’s advisers had forecast 2020 tax income for all levels of government — federal, regional and municipal — of €816.4bn. This has now been revised down by €98.6bn to €717.8bn. This compares to last year’s tax take of €799.3bn.

Estimates for tax revenues over the next few years have also been revised downwards — by €52.7bn in 2021, €59.1bn in 2022, €53.8bn in 2023 and €51.7bn in 2024. The tax estimate forms the basis for all negotiations over Germany’s budget.

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The total revisions between 2020 and 2024 amount to a €315.9bn shortfall — larger than the decline in expectations of tax revenue after the 2008-09 global financial crisis.

Marcel Fratzscher, head of the DIW economic think-tank, said the new figures “are still too optimistic, because a swift and strong economic recovery is becoming increasingly unrealistic”.

A statement by the German finance ministry blamed the corrections on the decline in corporate revenue and profits, the generous tax holidays decreed in March to help lockdown-afflicted businesses and new rules to allow companies to offset profits for tax purposes. Also, the income tax take was slashed as millions of workers were sent on extended furloughs.

While tax revenue has declined, spending has been ramped up to cushion the impact of the pandemic. In March the government unveiled an emergency Budget that envisaged €150bn in new borrowing — a radical departure from the policy of balanced budgets and no new debt.

Ministers say they have provided €453.4bn in emergency economic aid, as well as more than €800bn in loan guarantees for companies struggling in the crisis.

Germany has also suspended the “debt brake”, a rule enshrined in the country’s constitution that puts tight restrictions on the deficits a government can run. Mr Scholz on Thursday refused to say whether the debt brake should be put on hold next year, too.

Some economists insisted it should. “There is a real danger that a restrictive fiscal policy might hinder an economic recovery next year,” the Kiel Institute for the World Economy said.