Countries reached an agreement on investment prior to their meeting with Merz
Let's dive into the buzz in Berlin
The city's buzzing with anticipation as state leaders gather for a crucial meeting with Chancellor Friedrich Merz. Michael Kretschmer, Saxony's Minister President, shares a united front, "We're all in this together. We yearn for our nation's recovery after three grueling years of recession. We want this federal government to shine. If it does, it's a win for our country, states, and municipalities."
Kretschmer is optimistic about striking agreements with Merz and Federal Finance Minister Lars Klingbeil concerning compensation for municipalities and states. Olaf Lies, Lower Saxony's head honcho, stresses the urgency for federal decisions to enable state approval of the project on July 11 in the Bundesrat. Lies declares boldly, "I've got faith in the Chancellor's Office. The economy is waiting for some clarity."
Possible hang-ups with the proposed plan
The German parliament is set to decide on a program next Thursday that aims to kick-start the sluggish economy. The program offers incentives for investments, such as extended tax depreciation options for machinery and electric vehicles starting in 2028. The corporate tax rate will also decrease from 2028 onwards.
However, these plans could lead to substantial tax revenues losses for the federal government, states, and municipalities. According to the bill, municipalities might lose 13.5 billion euros, states 16.6 billion, and the federal government a whopping 18.3 billion - totaling around 48 billion.
Consequently, the states are pressing the federal government for financial compensation, particularly considering the precarious financial state of many heavily indebted municipalities.
The nuts and bolts of the investment package
The proposed investment package in Berlin encompasses a massive 500-billion-euro Infrastructure Fund, approved by the German parliament in March 2025, aiming to bolster infrastructure and climate-neutral investments over the next 12 years[1][3][5].
Additionally, the Growth Booster Program, launched by Chancellor Merz’s government in June 2025, includes substantial tax breaks and eventual corporate tax rate reductions to encourage investments[5]. Key features of the program include:
- Generous tax write-offs for investments in machinery and equipment over the next three years.
- Gradual reduction of the corporate tax rate from 15% to 10% between 2028 and 2032.
- Extra tax benefits for companies investing in electric vehicles and research and development.
The tax incentives involved in the Growth Booster Program will initially reduce tax incomes for federal, state, and municipal governments because of lower corporate tax receipts and progressive corporate tax rate reductions. However, these short-term reductions are an intentional move to stimulate investment. The German Institute for Economic Research (DIW Berlin) predicts that this package, combined with improved financing conditions, will boost Germany’s economic growth by 0.3% in 2025 and 1.7% in 2026, offsetting some negative effects on long-term tax revenues through enhanced overall economic activity[3][4]. In essence, while the proposed investment and tax incentive package may initially reduce tax revenues temporarily, it is designed to spur corporate investment, infrastructure development, and economic growth, which are expected to increase tax revenues in the long run by expanding the tax base[1][3][4][5].
The proposed investment package in Berlin and the Growth Booster Program, led by Chancellor Friedrich Merz, are subjects of intense discussion in the realms of finance, business, politics, and general-news, as they aim to invigorate Germany's economy but may lead to temporary tax revenue losses for federal, state, and municipal governments. The states are urging the federal government for financial compensation due to the precarious financial state of many heavily indebted municipalities.
