Immediate policy action against the social consequences of inflation in Germany

_ René Springer, member of the German Bundestag. Berlin, 11 November 2021.*

Inflation is here to stay

Inflation in Germany is currently at its highest level in 28 years. The inflation rate was 4.1 percent y.o.y. in September 2021. As of September 2021, energy products were even more expensive by 14.3 percent; the prices for the litre of petrol are approaching the 2 euros mark.

Inflation destroys wealth and biographies. The wealthy are less affected because their wealth is mostly invested in an inflation-protected manner. So, the main threat from inflation is the middle class and poorer people. The former because wealth often consists of non-inflation-protected assets such as life insurance or savings. The latter, because incomes and social benefits do not rise evenly with inflation, so that inflation “eats up” ever larger parts of the already low incomes.

The current, increasingly rampant inflation has various causes: The ECB’s monetary policy with negative interest rates and actual money printing and the massive increase in the money supply by over 12 percent annually, the consequences of the Corona restrictions, the disruption of supply chains and other special effects as well the burdening tax policy.

As external causes, some circumstances can hardly be influenced by German politics – and if so, then only in the long term. The focus must therefore be on eliminating the home-made causes of inflation, such as the horrendous taxation of energy and the new CO2 tax. Ultimately, social policy is required to protect the poorest in society.

Ther German federal climate- and tax policies make energy immensely more expensive. The consequences for poorer households in Germany are dramatic: people in Germany might even have to freeze this winter.

Germany is experiencing the strongest inflation in the last 28 years and is steering a sighted eye into an energy crisis. Instead of immediately reducing the enormous tax and levy burden on energy, the government is once again setting a spiral of intervention in motion. Because energy prices are rising through state intervention, further subsidies for the socially disadvantaged are being called for.

The aim must be to break this spiral. If the government cannot lower international energy prices on its own, then it must at least refrain from any domestic measure that would make energy even more expensive.

Conversely, the goal cannot be to build a bizarre climate bureaucracy that collects high energy taxes with one hand and then quasi-generously distributes them to certain groups of people with the other hand – minus bureaucracy costs.

Immediate policy measures

In view of the dramatic situation, politics cannot remain inactive. We therefore need the immediate implementation of the following measures in order to cushion the worst consequences of inflation and to prevent a wage-price spiral.

  1. Exempt the subsistence level – increase the basic tax allowance

After fulfilling his income tax liability, the German taxpayer must have at least as much left of what he has acquired as he needs to cover his necessary livelihood. The factual subsistence level needs therefore to be made tax-exempt. In view of the significantly increased inflation of over 4 percent, the existing basic tax allowance of 9,744 euros in 2021 and 9,984 euros in 2022 is unreasonably low. There needs to be an immediate increase in the basic tax credit to 12,600 EUR per year. With this measure, an impending “wage-price spiral” can be prevented since the employees will in future have a higher net income.

  1. Secure the subsistence level – adjust the standard rates in the basic security

The standard rates must ensure the subsistence level. This applies to the “Hartz IV” benefits as well as the basic security in old age and in the event of reduced earning capacity. However, the previous increase in the standard rate by 3 euros to 449 euros on January 1, 2022 remains well below the current inflation rate of over 4 percent and does not take into account the sharp rise in the costs of energy (14.3 percent) and food (4.9 percent). The federal government must immediately review and increase the standard rate in line with inflation. An appropriate increase is to be made for the year 2022, which also reflects the further price increase that is still to be expected.

  1. Abolition of the CO2 tax, EEG surcharge, energy tax and Building Energy Act

If energy costs rise sharply due to external factors such as supply bottlenecks, then the federal government has to react domestically where it can. The very first measure must be the immediate withdrawal of CO2 taxation. An end to the CO2 tax will immediately make energy cheaper, reduce bureaucracy and directly help the socially disadvantaged. In addition, an immediate abolition of the EEG surcharge, the energy tax and the Building Energy Act is called for.

  1. “Zero VAT” on electricity and gas

For consumers, the sales tax for energy (electricity, gas, heating oil, district heating, coal) should be reduced to zero percent for a limited period of time. The reduction is initially limited to November 2021 and January 2022.

  1. The ECB must take into account its mandate of monetary stability again

The primary goal of the European Central Bank (ECB) is to secure the monetary stability of the euro. In contrast, the ECB has been pursuing economic policy for years using currency and monetary policy. However, under the EU treaties, it is not entitled to an economic policy mandate. The German federal government needs to work in the EU to ensure that the ECB, in accordance with the decision of the Federal Constitutional Court, returns to a monetary policy that is based solely on the goals of European law. If this goal is not achieved in the near future, the experiment of a European single currency must be viewed as a failure.

  1. Take inflation into account in the minimum wage

So that the minimum wage can fulfil its protective function, it should also take inflation into account in the future – in addition to the development of wages. To this end, inflation should be included as a further weighing criterion in Section 9 (2) of the Minimum Wage Act.

  1. Facilitate personal provision – increase the saver exemption

In order to make it easier for savers and small shareholders to provide for their own retirement as a protection against poverty in old age and to take account of capital’s vulnerability to inflation, the saver tax exemption, which has remained unchanged since 2009, is to be increased from EUR 801 to EUR 1,200 and is to be indexed in the future.

  1. Immediate end to taxation of taxes

What many are not aware of: The goverment even charges sales tax from other taxes and duties. When gasoline is taxed, the pure gasoline price (costs of raw materials, transport, etc.) and the energy tax are added together and subject to sales tax. In the future, sales tax is to be calculated solely from the sales of goods, as is usual in almost all other areas. This leads to a considerable reduction in energy costs and, above all, relieves the burden on poorer households immediately and noticeably.

*Translated into English from the “Key points paper against the social consequences of inflation” by the AfD parliamentary group in the German Bundestag from 1 November 2021.

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