EU Economy
Germany may cut income tax; Germans still shun risky investments
By Michael Hennigan, Finfacts founder and editor
May 8, 2015 - 8:40 AM

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Germany may cut income tax after a government working group has forecast rising tax revenues in coming years. Meanwhile Germans remain cautious savers according to a new report.

Deutsche Welle reports that according to a new estimate released Thursday by the German government's working group on taxes, state and regional administrations as well as municipalities will earn a total of €280.3bn in taxes this year — €6.3bn more than forecast by the panel in its previous estimate in November. Next year, German tax income is expected to be €7.7bn higher, followed by an increase to €8.4bn in 2017, the tax experts calculated. Until 2019, the total sum of higher-than-expected state income from taxes would swell to about €38bn, they said.

DW said that Wolfgang Schäuble, finance minister, said on Thursday that his ministry was exploring changes to the tax system that would benefit workers. Schäuble said he was planning to tackle so-called "cold progression" — an injustice in the system arising when a pay hike places a person in a higher tax bracket, thus eating up parts or the entire raise. The measure would cost the German state about €1.5bn per year.

A report by Deutsche Bank says the financial situation of German households continued to improve markedly in 2014. The good income situation enabled them to make new investments to the tune of €160bn. In addition, the valuation gains on existing financial assets came to €53bn. Overall, total gross household financial assets increased from €5tn to €5.2n (180% of GDP).

The DB economists say that "nothing has fundamentally changed with regard to the minimal risk appetite of German investors; risk-bearing investments still constitute less than 25% of financial assets."

However, their share of new investments climbed to 11% — the highest figure since 2006 (33%). In both 2012 and 2013 cash was still being withdrawn from these asset classes. Furthermore, in 2014 €20.5bn of new debt was taken on — the largest amount since 2001. "Both developments have probably been heavily influenced by the low-interest rate environment and are likely to continue in 2015 given the monetary policy outlook. Germans, however, maintained their aversion to stocks in 2014."

The German savings ratio in Q4 2014 rose from 9.2% to 9.8% of disposable income and as of end-2014 it was equivalent to 125% of GDP or 211% of disposable income.

DB notes: "We have repeatedly drawn attention to the low risk appetite of German investors. And nothing has really changed in this respect. Risk-bearing investments, which we define as including stocks, debt securities and investment certificates, have almost constantly constituted some 23% of total financial assets over the last four years. By contrast, the cash and deposits share alone came to nearly 40% in 2014. Insurance and pension entitlements, which are only indirectly risk-bearing, constitute 37%. Overall, the changes in recent years have been few and far between, with a gradual increase in investment certificates and stocks having contrasted with the hardly surprising decline in bonds."

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