The recent surge in oil and energy prices is undermining the Berlin coalition’s plans for a large reform package this legislative period. According to the “Stern”, insiders from the governing Union and SPD had already agreed on a range of measures during confidential meetings. They intended to launch a major package of tax reliefs and social reforms in the summer and were also considering raising taxes to pay for it, including a VAT increase beginning at the end of 2027. An insider told the paper that in a situation where inflation is spurred by higher oil‑ and gas‑prices, such a step would be unsustainable.
In detail, the plans called for a comprehensive package to be assembled after work by various government committees. The goal was to broaden the funding base for statutory health insurance and to finance non‑insurance health services more heavily through taxes. The coalition also wanted to introduce structural reforms in pensions, health insurance and nursing care, pairing these with tax cuts. To counter‑balance the fiscal impact, they relied on a boom in the economy and a planned VAT rise of one to two percentage points-to 20 or 21 percent. To cushion the social impact, the reduced VAT rate on food would be lowered from the current 7 % to 5 %.
Internally, the government now foresees a significant drag on growth due to the aftermath of the Iran conflict. In various crisis meetings held over the past week, scenarios were discussed. On Friday, a group of economists and senior officials met at the Federal Ministry of Finance to analyse the effects of the rising oil and gas prices. According to the report, depending on the duration of the conflict, experts projected growth losses of at least 0.1 to 0.4 percentage points compared to earlier forecasts. If oil and gas prices stayed high for more than three months, a loss of a full percentage point would have to be feared, reports insiders.