Monika Schnitzer, chair of the German Council of Economic Experts, has urged the federal government to phase out various tax subsidies to address structural budget deficits. In a series of recent interviews, the economist argued that the current reliance on debt-financed spending is unsustainable, specifically highlighting the lower value-added tax (VAT) rate for the catering industry as a candidate for reversal.
The call comes as the German government faces ongoing debates regarding the “debt brake” (Schuldenbremse)—the constitutional rule limiting structural budget deficits—and the need to consolidate public finances. According to the German Council of Economic Experts, the country is currently operating in a mode of “living on borrowed time,” or “auf Pump,” necessitating a critical review of tax exemptions that were implemented during previous crises, such as the COVID-19 pandemic.
The Debate Over Gastro-Tax Subsidies
At the center of the discussion is the reduced 7% VAT rate for restaurant and catering services. This rate was temporarily lowered from the standard 19% in 2020 to support businesses during the pandemic-related lockdowns. While the reduced rate was extended multiple times, the government eventually allowed it to expire at the end of 2023, returning the tax rate to 19% on January 1, 2024, as confirmed by the Federal Ministry of Finance.
Schnitzer argues that such subsidies, once introduced, become difficult to rescind due to lobbying and political pressure. She maintains that the state should focus on promoting growth through investment rather than subsidizing specific sectors through permanent tax breaks. The return to the standard tax rate has been a point of contention for industry associations, which argue that higher costs for energy and raw materials have placed significant pressure on profit margins for small and medium-sized hospitality businesses.
Fiscal Consolidation and the Debt Brake
The broader context for these recommendations is the federal government’s struggle to balance fiscal policy with competing demands for increased defense spending, climate transition funding, and social welfare programs. The German Bundestag continues to deliberate on how to adhere to the debt brake, which limits new structural borrowing to 0.35% of GDP.
Schnitzer’s position, echoed by other members of the Council of Economic Experts, suggests that the government must prioritize the elimination of environmentally harmful subsidies and inefficient tax expenditures. By broadening the tax base through the removal of these exemptions, policymakers could theoretically generate the revenue necessary to fund future-oriented investments without violating constitutional debt limits.
Stakeholders and Economic Impact
The hospitality sector remains the most vocal opponent of the removal of tax reliefs. Industry representatives, such as the German Hotel and Restaurant Association (DEHOGA), have repeatedly warned that the tax hike contributes to a “dying out” of neighborhood restaurants and pubs. They point to an increase in menu prices that may drive consumers away, further exacerbating the sector’s post-pandemic recovery challenges.
Conversely, economic advisors argue that if the government continues to borrow to cover current expenditures, it limits the fiscal space available for long-term projects. This tension between immediate sector support and long-term fiscal discipline is a recurring theme in German economic policy. The debate is expected to intensify as the government prepares its upcoming federal budget drafts, with the 2025 budget planning currently underway.
Next Steps for Fiscal Policy
The federal government is expected to continue its consultations with economic advisory bodies throughout the current legislative session. The next major milestone for these discussions will be the presentation of the government’s updated tax revenue projections and the subsequent adjustments to the medium-term financial plan. Interested readers can monitor the Federal Ministry of Finance website for official updates on budget legislation and fiscal policy adjustments.
What is your perspective on the balance between industry subsidies and fiscal discipline? Share your thoughts and join the discussion in the comments section below.