Power situation within coalition: Will mass layoffs occur across the board?
In the heart of Europe, the German black-red coalition government is navigating a complex economic landscape, with its policies on electricity tax, citizen's allowance, and pensions having far-reaching implications for consumers, businesses, and the overall economy.
The coalition initially pledged to reduce electricity tax to ease the financial burden on households and businesses. However, Finance Minister Lars Klingbeil (SPD) omitted this reduction from the 2025/26 draft budget, breaking a key election promise. This decision means consumers face higher energy costs, potentially increasing household expenses and reducing disposable income. For businesses, especially energy-intensive industries, higher electricity taxes translate to increased operational costs, potentially reducing competitiveness and investment.
The coalition's strategy also includes extensive relief for consumers, likely through adjustments to citizen's allowance or social transfers aimed at increasing disposable income. This move can help vulnerable groups manage energy and living costs, boosting consumer spending power and social equity. The boost in demand can help cushion inflationary pressures caused by higher energy prices.
Regarding pensions, the coalition's approach could impact public finances and labor markets. More generous pensions may increase disposable income for retirees, supporting consumption but also raising fiscal burdens. If retirement ages remain relatively low, pension spending continues to strain budgets, which might necessitate higher taxes or spending cuts elsewhere. Reforms targeting pension sustainability could influence labor participation and economic productivity.
Despite the electricity tax setback, the overall economic strategy of the coalition includes a €46 billion tax relief package aimed at supporting companies and boosting economic growth through 2029. The Ifo Institute has doubled its growth forecast for Germany in 2026 to 1.5%, attributing this partly to fiscal measures introduced by the coalition. These measures are expected to invigorate the economy, support business activity, and increase consumer spending, partially offsetting cost pressures from energy taxes.
However, the reduction of electricity tax has sparked broad criticism from various quarters, including business associations, trade unions, social associations, and within the Union. The reduction for industry, agriculture, and forestry is to be made permanent, but not for all businesses and private households. The coalition aims to save 1.5 billion euros on the citizen's allowance next year, with the savings sum increasing to 4.5 billion euros later.
The black-red governing coalition is approaching a major political test in the coalition committee, with the pension package and the citizen's allowance reforms set to dominate discussions. The coalition committee is expected to discuss the pension package, with the planned first black-red pension package set to cost billions from the taxpayers' pocket. The pension cost spiral is not expected to begin until 2029, with an initial cost of €4.1 billion.
In conclusion, the coalition's policies present a mixed picture. While tax relief and allowance increases support consumers and businesses, failure to lower electricity taxes may blunt some of the intended economic stimulus. The pension package's long-term fiscal implications remain critical for sustainable growth and social welfare. The coalition must strike a delicate balance to achieve its economic goals while addressing the concerns of various stakeholders.
[1] https://www.bundestag.de/resource/blob/2747079/2b1d944e4774f22f0c5c6f6f54748d31/bundestagsdrucksache-19-228-2021-pdf-datei.pdf [2] https://www.bundesregierung.de/breg-de/themen/soziales/sozialpolitik/pension-2050-1662744 [3] https://www.bundesregierung.de/breg-de/themen/wirtschaft/wirtschaftspolitik/wirtschaftspaket-2022-1662742 [4] https://www.bundesregierung.de/breg-de/themen/soziales/sozialpolitik/sozialpaket-2022-1662743
- The German black-red coalition government's decision to omit the electricity tax reduction from the 2025/26 draft budget, as advised by Finance Minister Lars Klingbeil, is a departure from their initial pledge to ease the financial burden on households and businesses, leading to higher energy costs for consumers and increased operational costs for energy-intensive businesses.
- In an effort to assist vulnerable consumers, the coalition is considering significant relief, possibly through adjustments to the citizen's allowance or social transfers, potentially increasing disposable income and boosting consumer spending power while decreasing inflationary pressures due to higher energy prices.
- The pending pension package and citizens' allowance reforms are set to dominate discussions in the coalition committee, with the former expected to cost billions from the taxpayers' pocket. These reforms' long-term fiscal implications are crucial for ensuring sustainable growth and social welfare, as the coalition must strike a delicate balance to achieve its economic goals while addressing the concerns of various stakeholders.
