German parliament passes tax relief to offset inflation

BERLIN (Reuters) – German lawmakers passed a taxation reform on Thursday to combat the burden on households caused by higher inflation, with approval secured by the votes of the former coalition partners and the opposition conservatives.

The legislation, set to come into effect at the start of the year, has been pushed through parliament at speed as other bills fell by the wayside following the collapse of Chancellor Olaf Scholz’s three-way coalition in November.

The three parties – Scholz’s Social Democrats and its Green partners, together with the Free Democrats (FDP) who are now in opposition – joined forces again to back the relief, long sought by the FDP, which advocates lower taxes.

The conservative Christian Democrats also backed the reform, which seeks to adjust income tax brackets to prevent the ‘fiscal drag’ effect of higher inflation eating into households’ take-home pay.

SPD politician Michael Schrodi said the measure is expected to reduce annual tax revenue by 14 billion euros ($14.5 billion).

The states and local authorities will have to absorb a large part of the expected reduction in tax revenue. The taxation reform is planned to go to the upper house of parliament for a vote on Friday, where the support of state politicians will be needed.

Originally, further measures were planned to ease the burden on companies, such as extended depreciation options and research allowances. However, the parliamentary groups were no longer able to reach an agreement on this following the coalition’s collapse.

German political parties are fiercely debating ways to spur the country’s ailing economy ahead of snap elections set for Feb. 23. Disagreements over economic and fiscal policy were a key factor in the collapse of Scholz’s government.

($1 = 0.9639 euros)

(Reporting by Christian Kraemer and Maria Martinez, Writing by Rachel More; Editing by Keith Weir)