Bundesbank chief calls for tax cuts in Germany to boost investment

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Germany’s central bank chief has urged the government to cut taxes, reduce red tape, boost the workforce and increase the carbon tax to revive the country’s waning appeal to investors.

Joachim NagelBundesbank President said investors were increasingly shunning Europe’s largest economy, which “is lagging far behind in terms of growth” in international comparisons.

While there were “some economic bright spots” for the German economywhich returned to growth in the first quarter of this year after a year of contraction, Nagel said it “still faces major challenges” in areas such as renewable energy that would require significant investment to address.

Speaking at a conference in Frankfurt on Monday, he cited a recent study by the KfW development bank that found Germany would need some 5 trillion euros of investment to reach its goal of climate neutrality by 2045.

But Nagel said corporate investment has been declining recently and there is “widespread concern that investors are increasingly shunning Germany.” Among the structural problems deterring investors are high wage and energy costs, a shortage of skilled workers, uncertainty over regulation and a high tax burden, he added.

To provide more clarity on the need to move to a carbon-neutral economy, Nagel said the government should increase its carbon tax from current levels of 45 euros per tonne. “The carbon price should be applied as broadly, uniformly and predictably as possible,” he said.

He also suggested cutting taxes, adding that Germany’s high corporate tax rates are unfavourable compared to its international peers. “To create an environment conducive to employment and investment, it is important to monitor the tax burden on labour and capital.”

The Bundesbank president said the government should remove regulatory “bottlenecks” resulting from slow and cumbersome bureaucracy, adding that this was “clearly evident in the expansion of renewable energy, for example in wind turbines.”

TO increase the labor supply Referring to the many sectors suffering from a shortage of skilled workers, Nagel said the government should tap into a “hidden reserve” of some 3.2 million people who want to work but cannot because they have childcare needs or do not believe they will find suitable work.

Warning the government against relying too heavily on financial incentives such as the tens of billions of euros it has offered chipmakers to build new semiconductor plants in Germany, he said: “We must be careful not to get caught in the thicket of subsidies.”

Nagel said trying to attract investment with subsidies was “often plagued by bureaucracy, increasingly complex government interventions and a constant burden on public finances” and could risk companies postponing investment in the hope of securing state aid.

“I am convinced that Germany has no other option than to increase investment if it is to move on to a path of higher growth,” he said. “Politics can remove obstacles in many areas, but not in all.”

Nagel said more than half of companies that cut investment last year cited Germany’s “poor macroeconomic environment” as a factor influencing their decision, according to a Bundesbank survey. It also found that the proportion of German companies cutting investment was similar to the proportion of those increasing it.

TO study of international competitiveness Last month, Swiss university IMD found that Germany had lost ground, falling two places to 24th out of 67 countries ranked.

Germany’s economy grew 0.2 percent in the first three months of the year compared with the previous quarter. GDP fell 0.3 percent last year, making it the worst-performing economy among major economies.

Economists expect consumer spending to rebound after rapid wage increases and slowing inflation boosted household purchasing power. published on monday showed that German inflation fell slightly more than expected, from 2.8 percent in May to 2.5 percent in June.

Services inflation remained high: prices in the sector rose 3.9 percent year-on-year in June, the same rate as the previous month.