IMF urges Germany to chop taxes and improve infrastructure – Monetary Occasions

The IMF has called on Germany to lower taxes on poorer households and to invest more in the country’s infrastructure, as part of a broader effort to improve long-term competitiveness and help tackle economic imbalances.

“Germany’s economic fundamentals are sound, public and private balance sheets are healthy, unemployment is at a historical low, wages have finally accelerated, and the large current account surplus is slowly shrinking,” the fund says in its annual assessment of the German economy, released on Friday.

But the report also points to a series of longer-term challenges, including an ageing population and weak productivity growth. The IMF also warns that Germany’s “technological edge” is under threat, echoing widely-shared concerns that the country’s carmakers and other industrial groups have been slow to respond to the digital challenge and the potential for disruption coming from electronic vehicles.

In response to these and other problems, Germany should “use the space within the fiscal rules to bolster long-term growth and help rebalance the economy”. The report adds: “Priorities include lowering the burden of taxation on low-income households further while also reducing disincentives to work for secondary earners; expanding research and development credits for companies to speed up innovation; and continuing to invest in public infrastructure.”

The IMF notes that Germany has made some progress towards reducing its current account deficit — the size of which has been a longstanding irritant to trading partners like the US — but cautions that more needs to be done. “Though the external surplus has come down from its peak, it remains well above the level consistent with fundamentals and is expected to remain so in the medium term,” the fund says.

“This contributes to global imbalances at a time when trade tensions threaten Germany’s export dependent economy. Faster wage growth, which would be consistent with the very tight labour market, could help accelerate real exchange rate appreciation and speed up external rebalancing, while also ensuring that the benefits of growth are widely shared,” the report argues.

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