The federal government is not only taking money out of Germans’ pockets with the gas surcharge. The sanctions against Russia, the welfare state and our tax system ensure that inflation – and with it the money worries of many citizens – worsens.
Like Young Siegfried, everyone is talking about fighting inflation. But who are you actually fighting? And above all, where does the demon that reduces the purchasing power of our wages and attacks the substance of the savings have his home?
In which cave does the dragon breed its evil spawn? The answer is disturbing and has little in common with the narrative of the Nibelungen saga, where good wrestles with evil. Because the state itself is the major driver of the current currency devaluation.
Our young Siegfried is not as innocent as he pretends and not as brave as he claims. On the contrary, he is a very contradictory being: he fights evil by making deals with it.
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1. Gas surcharge as a driver of inflation: With the state-imposed surcharge on the already high gas price, the state pulls the money out of its citizens’ pockets like a large vacuum cleaner.
The surcharge is 2.419 cents per kilowatt hour and is to appear on consumer bills for the first time towards the end of the year in order to stabilize the energy companies. The VAT reduction envisaged by the Minister of Finance failed – unsurprisingly – due to the Brussels regulations.
In addition to the gas surcharge, value added tax is now also driving inflation. The truth is: The traffic light coalition, which constantly talks about relief, is artificially making the most expensive energy of all time even more expensive.
2. Welfare state, a driver of inflation: Since this government (like its predecessor) has got used to promising social benefits for which there is no counter-financing, the contributions are increasing. Today’s employee does not get more, he only pays more – through increasing subsidies from taxpayers’ money and increased contributions. From 2023, the contribution from statutory health insurance is set to increase by 0.3 percentage points to a new record of 16.2 percent.
There is no end in sight: According to the Federal Statistical Office, only 8.3 million people were between 15 and 24 years old at the end of last year, compared to more than 18 million people in Germany who are older than 65 years. The age pyramid is upside down.
Without political reforms, social security contributions would rise from 40 percent today to 48 percent by 2035, the new economist Martin Werding recently announced: “In order to close the financial gap, you would need an additional 180 billion euros per year in 2040.”
The truth is: The welfare state is systematically driving inflation, because less and less net remains from the gross.
3. Inflation driver sanctions policy: Since prices are an indicator of scarcity, the Western sanctions policy has an aggravating effect on the development of inflation. By rejecting Russian oil and by increasing uncertainty in the global energy markets by the economic war against Russia, all energy prices are going through the roof.
Oil (Brent) up 19 percent since January 2022. The price of European gas (TTF) has even risen by over 180 percent since the beginning of the year. The truth is: Putin benefits from these price jumps because his goods become more valuable. German consumers pay more.
4. Tax system that drives inflation: The progressive tax system exacerbates the problem. Because with the rise in prices, wages also rise and wage and income tax recipients automatically shift to the next higher tax rate.
An example: The unmarried electrical engineer Marina Mustermann earns 49,200 euros gross per year. After successful salary negotiations, she is to receive 52,890 euros in the future, a wage increase of 7.5 percent.
With the current inflation rate of 7.6 percent and the higher tax rate, her new net income would only increase to 38,781 euros and thus mean a real loss of income of 623 euros.
As of January 1, 2023, the Minister of Finance wants to combat cold progression. But Lindner’s proposal met with resistance from the Greens. Habeck says: “I don’t see how we can argue in this situation that those who need less support are absolutely more relieved.” If the Greens prevail here, there will automatically be a further devaluation of purchasing power.
The truth is: the reform planned by the finance minister is not a gift, but an adjustment for inflation. Anyone who refuses it deliberately damages the middle of working society – and increases the inflationary effect on labor income.
Conclusion: This government believes, like Young Siegfried, that it has bathed in dragon’s blood. But the many different policy approaches that constantly get in each other’s way are on her linden leaf on her shoulder. This economically contradictory government policy does not kill the inflation dragon, it feeds it.
Gabor Steingart is one of the best-known journalists in the country. He publishes the newsletter The Pioneer Briefing. The podcast of the same name is Germany’s leading daily podcast for politics and business. Since May 2020, Steingart has been working with his editorial staff on the ship “The Pioneer One”. Before founding Media Pioneer, Steingart was, among other things, Chairman of the Management Board of the Handelsblatt Media Group. You can subscribe to his free newsletter here.