Fiscal Policy Facing Major Challenges with Tax Reform, Need for Growth-Enhancing Investment and Consolidation Targets. Federal Fiscal Framework 2016-2019 and Draft Federal Budget 2016

Short- and medium-term fiscal planning is largely shaped by the tax reform 2015-16 which significantly lowers the burden of wage and assessed income tax as from 2016. Counter-financing the tax cuts via increases in other taxes and spending restraint on the part of the federal government and the Länder is one of the imminent challenges for fiscal policy. Uncertainty relates notably to the question whether the anticipated sizeable revenue gains from the fight against tax fraud and social security abuse will actually accrue in the short term. Further uncertainty surrounds the scope of further support for banks in distress and of current spending required for refugees and the unabated rise in unemployment. Efficiency-enhancing reform in public administration shall create the budgetary margin for a reinforcement of spending on forward-looking investment. Further reform steps are necessary to render the tax system more growth- and employment-friendly and socially equitable, and to foster its inherent environmental incentives.