Germany clears $34.63 billion tax cuts to give economy big boost

Germany’s coalition on Tuesday set aside weeks of squabbling to agree to a total of 32 billion euros ($34.63 billion) in corporate tax cuts over four years to boost the flagging economy.

A previous attempt to pass the “Growth Opportunities Law” earlier this month failed in what was widely seen as a sign the governing coalition of two socially-minded leftist parties and one economically liberal party was too unwieldy to govern.

“We’ll discuss how to achieve a big boost,” Chancellor Olaf Scholz said at the start of a two-day cabinet retreat at Schloss Meseberg, a baroque castle outside Berlin. “The German economy can do more.”

The German economy stagnated in the second quarter, showing no sign of recovery from a winter recession and cementing its position as one of the world’s weakest major economies.

According to the draft seen by Reuters, in its first year the stimulus package, modest in the context of a $4 trillion economy, will cause a tax revenue shortfall of 2.6 billion euros for the federal government, 2.5 billion euros for the states and 1.9 billion euros for the municipalities.

The law was championed by liberal Finance Minister Christian Lindner, but then stymied when Greens Family Minister Lisa Paus sought 12 billion euros for child support.

An agreement was reached on Tuesday when the two sides agreed to cut the planned Child Basic Insurance to just over two billion euros.

Lindner dismissed calls for the government to spend to help the economy grow again, saying spending would stoke inflation and corporate tax cuts would have a bigger impact.

Public dissatisfaction with the performance of the coalition is mounting. A poll by Forsa published on Tuesday found 61% of respondents were so annoyed by coalition squabbling that they no longer paid attention to policy.

The poll also found 63% thought Scholz was a weak leader, up from 51% in April.

A government source, asking not to be named, said it was no longer acceptable to focus political discussion on subsidies.

A government document seen by Reuters showed subsidies are set to almost double to 67.1 billion euros next year compared to 2021. Almost two thirds of those subsidies are designed to help finance the green transition to a lower carbon economy.

The new law gives incentives to companies to make climate friendly investments, provides tax incentives for research and allows companies to offset more losses against profits from other financial years.

Subsidies in Germany are expected to rise to a total of 67.1 billion euros ($72.36 billion) in 2024 to drive the transition towards a greener economy, up from 37.9 billion euros in 2021, according to a government document seen by Reuters on Tuesday.

The development is due to an increase in grants of around 30 billion euros from 2021 to 2024.

As Europe’s largest economy boosts such spending, some critics fear that without a new European Union green fund, only bigger countries with more fiscal power will be able to push ahead with national subsidies, leaving smaller countries behind.

State support can help drive innovative transformations and sustainable growth but it cannot replace private capital, according to government sources. Of the 138 subsidies, 109 are temporary.

The government paper shows that in 2023, 83 of the 138 financial grants budgeted with a volume of 39 billion euros were related to the government’s sustainability strategy.

The political discussion cannot be about more subsidies, the sources said, adding that it was much more important to examine where subsidies can be reduced.Germany is acting to unleash new investment with a multibillion-euro tax relief package in response to current economic challenges, Economy Minister Robert Habeck said on Tuesday as a two-day working retreat for cabinet got under way.

The Growth Opportunities Act is intended to work quickly, “because the environment is challenging”, Habeck said, listing high interest rates, weak exports and difficulties staying competitive globally as key problems.

“Now we should send out signals that it is worthwhile investing in this country,” he added. (Writing by Rachel More; editing by Matthias Williams)

Euro zone bond yields edged lower on Tuesday in a risk-on trading day and ahead of U.S. job openings data that may give clues whether the Federal Reserve will hike interest rates further.

U.S. job openings figures are due later in the day. With growing expectations those data points could come in soft, US Treasuries extended gains, driving two-year yields and 10-year yields lower.

In the meantime, the risk-on mood lifting European equities eased some appetite for safe-haven bonds. Bond prices move inversely with yields.

After central bankers in Jackson Hole on Friday did not provide many details on the direction of monetary policy, analysts are expecting euro zone bonds to move rangebound until the euro zone CPI and US labour market data releases.