German coalition parties agree €130b stimulus package to speed up recovery from coronavirus

Chancellor Angela Merkel said value-added tax will be reduced for six months starting in July 1.
Chancellor Angela Merkel said value-added tax will be reduced for six months starting in July 1.PHOTO: EPA-EFE

BERLIN (REUTERS) - Chancellor Angela Merkel's ruling coalition on Wednesday (June 3) agreed a bumper stimulus package to speed up Germany's recovery from the coronavirus.

Speaking at a news conference after marathon talks that extended well into the night, Merkel said the package would amount to €130 billion (S$204 billion) and include lower value-added tax (VAT) to boost consumption.

"The size of the package will amount to €130 billion for the years 2020/2021, €120 billion of which will be spent by the federal government," Merkel said. "So we have an economic stimulus package, a package for the future."

The stimulus programme follows a €750 billion rescue package agreed in March which encompassed a debt-financed supplementary budget of €156 billion.

Germany's measures, which together with liquidity aid and loan guarantees equal more than 30 per cent of its economic output, go substantially beyond any other national emergency programmes launched by other euro zone countries.

Merkel said VAT will be reduced from 19 per cent to 16 per cent for six months starting in July 1. A lower VAT rate for hospitality of 7 per cent would be lowered by two points over the same period. The overall cost of the VAT measures amount to €20 billion.

Finance Minister Olaf Scholz said the package will be partly financed by additional net new borrowing. Some €60 billion of the €156 billion in new debt approved in March have not been tapped, he added.

Germany can afford generous spending splurges given it had a balanced budget since 2014 and had a debt to output ratio of 60 per cent before the pandemic, well below euro zone partners like Italy, Spain and France.

"We can do this because we economised well in recent years,"said Scholz. "We want to come out of this crisis with vigour."

 
 
 

The package also includes at least €10 billion a year to help municipalities struggling with lower tax receipts with public spending on infrastructure and housing.

The sheer scale of Germany's new spending splurge has raised concerns among officials from economically weaker countries that the discrepancy in aid measures could worsen imbalances in the bloc and distort the European Union's single market.

The measures also include a one-time, €300 stipend per child to help families as well as a doubling of incentives to promote the sale of electric cars.

Germany has weathered the crisis better than many of its European neighbours.

Widespread testing, a robust healthcare system and restrictive measures have helped it keep deaths relatively low.

 
 
 

The economic impact of the crisis has also been cushioned by a decision to keep factories and construction sites open as well as generous government financial assistance to businesses and freelancers.

The economy is expected to shrink by 6.3 per cent this year, sinking into its worst recession since World War Two.

In a concession to the SPD, Merkel's conservatives dropped demands for cash incentives to promote the sale of combustion engine cars. The SPD appeared to have partly given up on a €57 billion package to help municipalities, especially those with high debt.