German cabinet agrees to expand tax relief to boost economy

By Christian Kraemer

BERLIN (Reuters) -Germany's cabinet agreed on Wednesday to increase tax relief for companies and households to almost 21 billion euros per year to help bolster stuttering growth in Europe's biggest economy.

Germany was the worst performing major economy last year, with gross domestic product contracting by 0.3%. It skirted a recession at the start of the year but growth has been slower than expected.

The tax reform, part of an outline 2025 budget deal agreed earlier this month, sets out plans for 20.9 billion euros ($22.7 billion) of annual tax relief, the finance ministry said. That compares to the previously planned 12.8 billion euros.

"The cabinet has cleared the way for a 30 billion euro reduction in the tax burden in 2025 and 2026," German Finance Minister Christian Lindner said on social media platform X.

A spokesperson from the finance ministry told Reuters that the minister was referring to the 21 billion euros from the tax reform and tax relief from another law that will further increase the basic tax-free allowance.

The details of the package, hammered out by Social Democrat Scholz's awkward three-way coalition with the Greens and pro-business Free Democrats (FDP), are now being finalised.

Chancellor Olaf Scholz, addressing his summer news conference, described the economic package agreed by the coalition as "a very comprehensive growth initiative," which the government hopes will lead to extra growth of more than half a percentage point in 2025, although economists are doubtful.

For companies, the measures include extending until 2028 a scheme allowing firms faster depreciation of their assets, so reducing their tax burden and encouraging them to invest sooner. Tax incentives for research will also be extended.

For households, the tax-free allowance on the lowest income tax bracket will rise by 300 euros to 12,084 euros next year and rise again in 2026. Income tax brackets will be adjusted in line with inflation for 2025 and 2026, and child benefit will rise.

The plans need the approval of the upper and lower houses of parliament later this year. They will need votes from opposition conservatives in the Bundesrat, the legislative body that represents the 16 German states at the federal level.

This could be awkward because states and municipalities will have to shoulder the bulk of the expected tax revenue shortfall. Of the decline of 21 billion euros in tax revenues, 7.6 billion euros will be absorbed by the states and 4.8 billion euros by the municipalities.

Scholz expressed his conviction that this time German states' representatives would not block the package in the upper chamber, as happened last year with the Growth Opportunities Act.

($1 = 0.9229 euros)

(Reporting by Christian Kraemer; Writing by Madeline Chambers and Maria Martinez; Editing by Kevin Liffey, William Maclean)