IMF tells Germany to adjust ‘inaccurate’ tax projection model

The IMF’s intervention comes just days after German finance minister Wolfgang Schäuble announced the country’s tax revenues would overshoot estimates by €7.9bn, reports Public Finance International.

It noted that the country’s tax projections have been “overly conservative” since the financial crisis in 2008, resulting in imprecise planning and a more restricted fiscal stance than originally intended.

Germany is already being criticised – including by the IMF – for being too tight-fisted when it comes to investment, which some say undermines domestic and regional growth or productivity.

The fund reiterated its argument for higher public investment in its latest health check of the German economy, published today.

It highlighted that last year, Germany’s current account surplus – or the difference between money and goods flowing in to and out of the country – was the world’s largest in US dollar terms, and a point of contention for the US and some other EU leaders.

While this surplus is predicted to fall from 8.3% of GDP to around 7.5% by 2022, the IMF said a surplus of between 2.5% and 5% would be appropriate.

Directly contradicting the thinking of Schäuble, who wants to use the recent tax windfall to cut tax rates for low- and middle-income earners, the fund encouraged Berlin to raid its coffers to fund investments in infrastructure, childcare and training, particularly for refugees.

“Policies that boost public and private investment and reduce the need for private saving (such as through promoting longer working lives), would accelerate the necessary rebalancing process,” it added.

While the fund said Germany’s fiscal position has continued to improve – further emphasising its point that the country has the money to invest – it said encouraging individuals to stay in work longer, for example through pension incentives, would help tackle longer-term challenges to the public finances.

“Germany’s open and innovative economy has been performing well, underpinned by prudent economic management, past structural reforms, and a well-developed social safety net,” the IMF stated.

It said the country should embrace reforms to safeguard its strengths and address remaining challenges, pointing in particular to the imbalance between Germany’s inflows and outflows.

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