German frontrunner Friedrich Merz faces row over unfunded tax cuts

German election frontrunner Friedrich Merz is facing attacks from rivals and economists ahead of the launch of his party’s manifesto over how he plans to pay for tens of billions of euros in planned tax cuts while also upholding strict borrowing limits.

Merz, the head of the opposition Christian Democratic Union (CDU), which is leading opinion polls, will promise to lift the German economy out of a deep malaise on Tuesday as he kick-starts the campaign for early elections on February 23.

But his rivals from Chancellor Olaf Scholz’s Social Democrats (SPD) and the Green party, as well as prominent economists, have questioned his plans to slash income tax, reduce social security contributions and cut corporation tax while also maintaining the “debt brake” that places strict limits on government borrowing.

“Clearly the CDU is facing a dilemma that it has not resolved,” said Marcel Fratzscher, head of the German Institute for Economic Research, who said that the proposed tax cuts would cost €99bn a year — more than a fifth of the annual federal budget, which is estimated at €481bn for 2025. New revenue streams would bring in an estimated €25bn, Fratzscher said.

“You can’t rule out tax increases, at the same time promise no new debt, and [then] promise tax cuts in the order of magnitude of 2 per cent of GDP in net terms,” he said. “This is just a contradiction in terms.”

Robert Habeck, the candidate for chancellor for the Greens, said that the plans were “unfunded” and meant that a government headed by Merz would be one of “unsound finances.”

SPD co-chair Lars Klingbeil said that either the Union — as the CDU and its Bavarian sister party, the Christian Social Union, are jointly known — had “not done any serious calculations” or had a “secret list of cuts” that would affect pensions, the health system and the welfare state. 

Merz, a former businessman and ex-chair of BlackRock Germany, has hit back at the criticism, arguing that boosting GDP growth to an annual rate of just 1 per cent — a level he described as “the lower limit of what we have to achieve” — would deliver tens of billions more in government revenue each year. 

He also said that a plan to abolish Bürgergeld, a system of welfare payments for the poor, and replace it with a new model designed to incentivise work, would also save “tens of billions.”

“We will switch gears, and shift into growth and employment,” he told state broadcaster ARD. “Then things will start to look up again in this economy. And then the calculations will also turn out quite differently.”

Germany’s economy has barely grown since before the pandemic, with the Bundesbank saying last week that it expected an expansion of just 0.1 per cent in 2025.

Guntram Wolff, senior fellow at think-tank Bruegel and professor at the Free University of Brussels, said Germany’s higher defence spending needs in particular made Merz’s calculations questionable. 

Pointing to likely pressure from Nato for Germany to spend 3 per cent of GDP on defence after Donald Trump takes office, he said: “This is another €60-70bn per year in the budget. You’re never going to get this by cutting a little bit of social security — that’s not going to do the trick.”

Wolff added: “Either they have to raise taxes or get more flexibility on the debt brake.”

The election, which follows the collapse of Scholz’s bickering three-way coalition last month, is set to be a battle between two starkly differing visions for Europe’s largest economy, which faces existential questions about its export-driven model.

Merz has said that Germans need to work harder to boost productivity and growth and reduce welfare spending. Scholz has cast himself as a protector of those on lower incomes as he seeks to revive the fortunes of his party, which is languishing third in the polls, behind the far-right Alternative for Germany (AfD).

His party’s manifesto, which will also be unveiled on Tuesday, promises a €100bn “Germany fund” aimed at boosting investment and growth, combined with reform of the debt brake to enable the extra spending, according to a draft seen by the Financial Times.

The SPD manifesto pledges to cut value added tax on food, boost the minimum wage, extend parental leave and offer greater protection for renters — a plan attacked by Merz as “tax increases, more debt, more redistribution at the expense of the younger generation.”

In a campaign that will be fought alongside the threat of a strong finish by the AfD, the SPD election programme contrasts with the CDU’s tough stance on migration.

While the CDU wants a “strict limitation” of migration to combat an “unmanageable influx”, the SPD instead calls for “humanitarian responsibility”. 

The two parties have also diverged on Russia’s war in Ukraine, with Merz repeatedly promising to arm Kyiv with long-range Taurus missiles — although his party’s manifesto does not include a pledge on the weapons. 

Uwe Jun, a political scientist at Trier University, said mainstream parties were presenting “clear differences” to the electorate, with the CDU and the smaller liberal Free Democrats pushing for supply-side reforms to lift growth and the Social Democrats and the Greens focused on fiscal stimulus.

While the starkly diverging platforms offer a clear choice for voters, Jun said that also risked creating a very difficult task for post-election negotiations, with the CDU most likely to form a government either with the SPD or the Greens. He added: “The coalition bargaining process will be very difficult.”