German industry expects marginal benefits from new government growth package

German industry association BDI expects only “marginal” growth effects from an economic package adopted by the country’s coalition government on Wednesday (17 July), including tax incentives to encourage foreign workers, bureaucracy reduction, trade deals plans and tweaks to existing EU measures.

On Wednesday, the government’s cabinet officially adopted the draft budget for 2025 alongside an economic growth initiative based on a political deal struck two weeks ago.

A total of 49 measures were agreed upon, ranging from tax incentives for private investments and skilled foreign workers to bureaucracy reduction and plans to build back-up capacity for fluctuating renewable energy – all of which should lead to a “strong impetus for growth,” Economy Minister Robert Habeck (Greens) said in a statement.

However, BDI struck a more sober tone.

“Even if the agreed measures pass the Bundestag and Bundesrat [chambers of German parliament] and are implemented one-to-one, we expect only marginal growth effects,” BDI’s general director Tanja Gönner said in a statement.

“Individual structural reforms are likely to improve growth moderately,” she added.

BDI did not want to specify what this will mean in numerical terms, while Habeck expects an additional economic growth of 0.6% from the package, which also entails higher expected tax revenues for next year’s federal budget.

The fairly high growth rate expectations for the adopted measures have been one of the ways in which the government was able to  increase its fiscal capacity for the 2025 budget. To avoid breaching the rules of the country’s constitutional ‘debt brake’, structural deficits would be limited to 0.35% of GDP, according to budget experts.

Foreign work incentives spark controversy

The economic package sparked some controversy even within the three-party government coalition, as the planned tax incentive for skilled foreign workers would see these being granted more benefits than German workers since they would be able to get a reduction of their taxable income by 30, 20, and 10% respectively in each of the first three years working in Germany.

Labour Minister Hubertus Heil (SPD/S&D) said last week that he was “not terribly happy” with the idea, and that “tak[ing] a closer look” would be warranted.

When asked about the measure in a press conference on Wednesday, Finance Minister Christian Lindner (FDP/Renew) stressed that the tax incentive does not apply to every foreign worker.

“It is explicitly not about every immigrant entering the labour market, but about top talent, who could then receive a tax-free allowance, a kind of tax recruitment bonus, un-technically speaking,” he said.

He explained that the definition of “top talent” would be based on the EU’s Blue Card scheme, adding that the scheme should be open to both EU and non-EU immigrants.

Lindner, however, said he took note of the “reserved” reactions by employers’ associations to the proposal. “That is why we will first seek dialogue because we will not introduce anything not actively used by employers,” he added.

German push on EU-level measures

The growth package also includes several initiatives the German government seeks to foster at the EU level, motivated by the objective of supporting the country’s strong export sector.

“Our goal remains to conclude the most comprehensive economic agreements possible with our global partners, particularly in North and Latin America and the Asia-Pacific region,” the agreement states.

The government will, therefore, advocate for the conclusion of so-called “EU only” trade deals, which don’t require ratification from all member states as they hinge on EU competences only, such as tariffs, rather than on more political elements.

This follows a similar call made by German Chancellor Olaf Scholz (SPD/S&D) at the end of June ahead of the EU leaders’ summit in Brussels.

The coalition deal would also include measures to compensate non-EU exporters for the carbon price they have to pay as part of the EU’s Emissions Trading System (ETS)—an issue that was not included in the bloc’s last ETS reform due to concerns that it could not be implemented in a way compatible with the rules of the World Trade Organisation (WTO).

“The German government will […] advocate a solution at a European level that must take WTO concerns into account,” the agreement states, arguing that “it would be the logical complement to the newly introduced European ‘Carbon Border Adjustment Mechanism’ on the import side.”

Moreover, to reduce burdens on companies, the coalition agreed on measures that would reduce its national corporate due diligence law by replacing it with an early phased-in application of the narrower EU supply chain directive – a move that could be at odds with EU law itself, according to lawyers.

Notably, the deal also seeks to scale down reporting obligations for companies under the Corporate Sustainability Reporting Directive (CSRD)  – something that echoes recent vows by the EU centre-right majority group, the European People’s Party.

“We will also lobby the European Commission to significantly reduce the very extensive requirements regarding the content of sustainability reporting in the CSRD,” the coalition agreement says.

Though the ministers’ cabinet agreed on the overall package, the individual legislative measures will still need to be developed by the responsible ministries.

[Edited by Rajnish Singh/Anna Brunetti]

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