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Tax increase instead of relief: 4.1 billion euros more – and yet no room for a reduction in electricity tax?

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Published on: October 22, 2026 / Updated on: October 22, 2026 – Author: Konrad Wolfenstein

Tax increase instead of relief: 4.1 billion euros more – and yet no room for a reduction in electricity tax?

Tax increase instead of relief: 4.1 billion euros more – and still no room for a reduction in electricity tax? – Creative image on the topic, created with AI: Xpert.Digital

The state is collecting more money than ever – and yet explains to its citizens why nothing is left for them

The state is taking in more and more money – which is why labor and energy remain expensive nonetheless

Germany is heading for a record year in tax revenues: in 2027, the federal government could take in €398.6 billion, while the federal, state, and local governments together are expected to exceed the €1 trillion mark for the first time. Despite this, the federal government sees little room for broad tax relief. A reduction in the electricity tax is controversial, an income tax reform is still pending, and a budget shortfall of €28 billion remains for 2028. At the same time, new or higher taxes on tobacco, plastics, and sugary products are under discussion.

The contradiction is obvious: How can the state take in ever-increasing amounts of revenue and yet declare that there is hardly any money available for tax relief? The answer lies not solely in the debt brake or the level of tax revenue. Rising social spending, higher interest costs, defense, and the substantial need for investment tie up considerable resources. At the same time, the burden on labor and businesses remains high. The current tax revenue forecast is therefore less evidence of fiscal success than an opportunity to discuss priorities, spending, and growth. Because sustained fiscal leeway is not created by ever-new record figures, but by a state that uses its revenue efficiently and does not unnecessarily burden labor, energy, and investment.

Germany's tax paradox: Record revenues, but no relief

Germany is heading for a new revenue record in 2027. According to the latest tax estimate, the federal government is expected to take in €398.6 billion, €4.1 billion more than projected in the spring. The federal, state, and local governments together can expect around €10.9 billion in additional revenue, marking the first time tax revenue has exceeded €1 trillion. At first glance, this is good news: the economy is developing somewhat more favorably, employment is stabilizing revenues, and the state has a more robust financial foundation than feared just a few months ago.

However, this paints a perplexing picture for taxpayers, businesses, and municipalities. Although revenues are rising, the federal government declares there is no new financial leeway. A comprehensive reduction in the electricity tax remains controversial, the planned income tax reform is not yet factored into the new estimate, and a budget shortfall of €28 billion is still projected for 2028. At the same time, additional revenue from a higher tobacco tax and new levies on plastics and sugary products is intended to help stabilize the financial plan. So, the government is taking in more money, planning further burdens, and yet still points to empty coffers.

This contradiction is not merely a communication problem. It points to a structural dilemma in German fiscal policy: revenues are growing, but fixed expenditures, which are difficult to change politically, are growing much faster. At the same time, expectations for defense, infrastructure, social security, climate policy, and economic transformation are rising. The result is a situation in which record tax revenues do not create fiscal freedom, but merely prevent existing gaps from widening further. This is precisely why the current development can be presented as stabilization, but hardly as a convincing fiscal success.

Why an extra 4.1 billion euros does not mean 4.1 billion euros freely available

The central misinterpretation of the tax revenue forecast lies in the assumption that additional revenue is equivalent to freely available funds. The 4.1 billion euros are not an unexpected transfer to a separate account, but rather a change compared to a previous forecast. At the same time, other aspects of the budget are changing: expenditure estimates are rising, interest costs are increasing, economic assumptions are being adjusted, and permissible borrowing may decrease. Therefore, a better revenue forecast initially only improves the basis for calculation. It does not automatically create the same amount of money for new policy initiatives.

The federal government's tax surplus amounts to just over one percent of the expected tax revenue of €398.6 billion. Compared to the core budget projected for 2027, which is more than €555 billion, it is even less than one percent. In a private household, such a surplus would be welcome, but insufficient to sustainably incur large new obligations. This is all the more true for the federal budget, because even small percentage changes in social spending, interest rates, or personnel costs can affect billions of euros.

Furthermore, tax estimates are not guaranteed. They are based on assumptions about growth, wages, employment, corporate profits, private consumption, and price developments. Geopolitical crises, energy price shocks, weaker global trade, or another industrial recession can significantly reduce actual revenues. Those who use an improved forecast entirely for permanent tax relief before the money has actually been disbursed increase the risk of later cuts or new debt.

Nevertheless, the finance minister's cautious stance is only half the story. Even if the surplus isn't fully earmarked, it demonstrates that the state's revenue side is fundamentally sound. The political question, therefore, isn't simply whether 4.1 billion euros will suffice, but rather why a state with nearly 400 billion euros in federal taxes and over one trillion euros in total government tax revenue places so little priority on broad-based tax relief for labor, energy, and investment. Simply explaining why additional funds are already committed doesn't address whether these existing commitments are sensible, efficient, and conducive to growth.

The debt brake neutralizes some of the good news

A key reason for the limited leeway lies in the way the debt brake works. It distinguishes between a structural deficit and a cyclical component. In economically weak times, the government is permitted to take on additional debt because tax revenues are lower and stabilizing expenditures increase. If the economy improves, this cyclical borrowing leeway decreases again. A portion of the higher tax revenues is therefore offset by the fact that the federal government is allowed to take on less new debt.

Economically, this mechanism is fundamentally plausible. It is designed to prevent the government from spending every additional source of revenue during prosperous times while simultaneously maintaining the borrowing capacity granted during economic downturns. Without such symmetry, debt would continue to rise indefinitely throughout the business cycle. Therefore, the fact that an improved economic situation cannot be fully translated into additional spending is not an accounting trick, but rather an integral part of rules-based fiscal policy.

Politically, however, the effect is paradoxical. The government announces improved growth and revenue forecasts, but at the same time has to admit that this hardly translates into any additional room for maneuver. Citizens get the impression that a weak economy justifies higher debt, while a strong economy leads neither to lower taxes nor to noticeably better services. This perception problem is serious because the acceptance of fiscal rules depends on their logic remaining comprehensible and on the population receiving a tangible benefit during periods of economic prosperity.

The debt brake does not explain all the bottlenecks. The federal government already makes considerable use of special, debt-financed spending options for defense, security, infrastructure, and climate neutrality. The core budget for 2027 projects net borrowing of €118.7 billion, a large portion of which is attributable to the constitutional exemption for security-related expenditures. Germany is therefore not suffering from a complete ban on additional financing. The real problem is that even very high borrowing volumes and rising tax revenues are encountering an expenditure structure that contains hardly any reserves.

The federal budget is growing faster than the willingness to provide relief

The government's draft budget projects expenditures of approximately €555.4 billion for 2027. This is about €30.9 billion, or 5.9 percent, more than in 2026. The budget is thus growing significantly faster than the real production potential of the German economy. This magnitude alone puts the €4.1 billion increase in revenue into perspective: the additional tax revenue covers only a small portion of the planned increase in spending.

Three budget categories are developing particularly dynamically. The budget for labor and social affairs exceeds €201 billion, interest payments are rising to almost €42 billion, and the defense budget is projected to grow to nearly €110 billion. Each of these areas follows its own logic. Social spending is driven by demographics, statutory benefit entitlements, and weak incentives to work. Higher interest costs are a consequence of increased capital market interest rates and growing loan volumes. Defense spending reflects the changed security situation in Europe and the years-long investment backlog in the German armed forces.

None of these areas can be arbitrarily cut in the short term. Nevertheless, their political inviolability must not lead to taxpayers automatically becoming a mere afterthought. If every new revenue stream is absorbed by rising mandatory expenditures, the result is a state that nominally grows ever larger without improving its economic capacity. This is particularly problematic when higher spending is not accompanied by measurably better infrastructure, more efficient public authorities, greater internal and external security, or more effective social services.

A serious debate on tax relief must therefore include the expenditure side. A permanent tax cut cannot be financed solely from a one-off improvement in the forecast. However, it can certainly be achieved through prioritization, the reduction of ineffective subsidies, more efficient administration, a stronger focus on employment for social transfers, and a limitation of consumption-driven spending. The argument of a lack of fiscal space is only convincing if the government simultaneously demonstrates where it is reforming structures. Without this evidence of reform, the tight budget appears not as an unavoidable law of nature, but as the result of political decisions.

The real burden lies on work and performance

The debate about tax revenue estimates falls short if it focuses solely on total revenue. The crucial question is where the revenue comes from and what economic incentives it creates. Germany imposes an exceptionally high tax burden on labor compared to other countries. For a single average earner, nearly half of total labor costs are attributable to income tax and employee and employer contributions to social security. This places Germany at the top of the tax burden scale within the OECD.

This tax burden has several consequences. Employees only partially experience salary increases as higher net pay. Companies have to pay significantly more than their employees actually receive. Additional working hours, a move to a better-paying position, or the transition from part-time to full-time work become less attractive when a large portion of the extra earnings is consumed by taxes, contributions, and the simultaneous loss of income-related benefits. This is not just a matter of individual fairness, but a macroeconomic problem in a country with an aging population and a growing shortage of skilled workers.

While compensating for bracket creep prevents inflation-based wage adjustments from automatically leading to a higher real tax burden, it doesn't solve the fundamental problem of steep tax rates and high social security contributions. Similarly, raising the basic tax allowance primarily protects the subsistence level. It is constitutionally mandated and should not be confused with voluntary, growth-oriented tax relief. A genuine reform would have to go further and, in particular, smooth out the tax brackets for lower and middle-income earners.

This is precisely where the question of tax relief becomes justified. If the state achieves record revenues while labor remains highly taxed by international standards, it is not enough to simply present budget stability as a success. Fiscal stability is important, but it is not an end in itself. It should provide the foundation for citizens to act economically, for companies to invest, and for the state to fulfill its core responsibilities. If too little of every additional euro of added value remains with those who generate it, revenue policy weakens its own foundation in the long run.

The income tax reform is relevant, but not yet a game-changer

The income tax reform planned for 2027 will change the assessment of the current situation. It is not yet included in the latest tax estimate and, once fully implemented, is expected to provide tax relief of around ten billion euros per year. The reform includes higher basic and child tax allowances, increased child benefits, improvements to the employee lump-sum allowance, and a flatter tax rate progression for taxable incomes between 17,800 and 70,600 euros. The full effect is expected to take place in 2028.

Therefore, the claim that there will be no tax relief at all is too sweeping. The reform can bring noticeable improvements for families and employees with low and middle incomes. A working family with two children and a total taxable income of €60,000 is expected to see a reduction of more than €600 annually starting in 2028. This is not a symbolic amount, but given high housing, energy, transportation, and food costs, it also doesn't represent a fundamental leap in prosperity.

Furthermore, a distinction must be made between gross and net tax relief. If social security contributions, municipal fees, energy prices, or indirect taxes rise simultaneously, the financial benefit can be partially or completely negated. Similarly, offsetting the increase through higher taxes on very high incomes and the reduction of tax breaks alters the distributional impact. The reform can be socially balanced without significantly lowering the overall level of taxes and levies.

Politically, credibility is also crucial. A reform that has been announced and approved by the cabinet, but is not yet included in the current tax revenue forecast, remains a source of uncertainty for budget planning. This is especially true as long as there is ongoing debate about other revenue sources and spending cuts. The government should therefore clearly explain what portion of the ten billion euros actually represents additional net tax relief, what portion merely compensates for inflation, and how the long-term financing will be structured. Only then can it be assessed whether the reform truly deserves the name "structural reform" or is primarily a necessary adjustment to the tax rates.

 

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Why a reduction in electricity tax is important for the German economy

The electricity tax has become a test of political credibility

Few measures exacerbate the contradictions in fiscal policy as much as the promised reduction in electricity tax. A reduction to the European minimum level for all consumers would, according to calculations by the Finance Ministry, likely cost the federal budget around €5.4 billion per year. This exceeds the additional federal tax revenue of €4.1 billion. Therefore, even mathematically, the measure cannot be financed solely from the improved estimate.

At the same time, tax relief would be more economically sensible than some piecemeal subsidies. Lower electricity costs would benefit private households, retailers, service providers, and small businesses. They would also make the electrification of heating, transportation, and manufacturing more attractive. Those who want to promote heat pumps, electric vehicles, and digital processes should not simultaneously increase the price of electricity with a tax historically introduced for environmental reasons, while renewable energies are increasingly being integrated into the system.

For individual households, however, the direct savings would be limited. Depending on consumption, singles could save only a few dozen euros, couples around 65 euros, and families approximately 90 euros per year. The measure would therefore not be a major social program. Its strength would lie rather in its broad scope, simplicity, and symbolic impact. It would work without complicated applications, lower the price of a key energy source for the future, and visibly fulfill a political promise.

The finance minister does, however, have a valid point: a permanent tax cut requires permanent offsetting funding. It would be irresponsible to base €5.4 billion in recurring revenue shortfalls solely on the hope that higher growth will later close the gap. Growth effects may occur, but they are neither immediate nor fully guaranteed. The better solution would be a package consisting of electricity tax cuts, the reduction of climate-damaging or ineffective subsidies, efficiency gains in the budget, and reliable financing from energy and climate policy revenues. The government must decide whether cheaper electricity is a strategic goal or merely a well-intentioned objective subject to funding availability.

New consumption taxes will not solve a structural budget problem

While tax relief measures are facing funding concerns, the federal government is planning additional revenue from higher or new excise taxes. A higher tobacco tax is expected to generate several hundred million euros in additional revenue by 2027. Furthermore, a levy on plastics and a tax on products with high sugar content are being considered. These instruments can pursue public health or environmental objectives, but in the current budget planning, they also serve to close funding gaps.

Steering taxes present a fundamental dilemma. If they achieve their political objective, taxed consumption decreases, and consequently, so does revenue in the long run. If revenues remain consistently high, the steering effect is limited. A household that relies heavily on such revenues therefore faces a conflict of objectives. From a fiscal perspective, it needs precisely the behavior it wants to discourage for health or environmental reasons.

The distributional impact also deserves attention. Excise taxes often disproportionately burden low-income households because they spend a larger share of their disposable income on consumption. While a higher tobacco tax can be justified on health grounds, a broad levy on plastics is likely to result in price increases being passed on to numerous everyday products. A sugar tax can incentivize manufacturers to change their recipes, but if passed on in full, it will also affect consumers. New levies should therefore not be treated as an invisible and politically more convenient alternative to openly debated tax increases.

It is particularly problematic to plan for uncertain revenues to close specific budget gaps. There are considerable reservations within the EU regarding the plastics levy. The design of other excise taxes is also not yet fully settled politically and administratively. If a gap originally estimated at €34 billion is partially closed with revenues whose legal basis or political majority is not yet secured, the resulting planning becomes fragile. Sound fiscal policy requires that unapproved burdens be treated, at most, as risk positions, not as a reliable foundation.

The open gap of 28 billion euros reveals the real problem

According to the Finance Minister, a budget shortfall of €28 billion will remain for 2028. This amount is almost seven times the current federal tax surplus. He makes it clear that while the debate over €4.1 billion is politically charged, it is merely a sideshow from a fiscal perspective. Even if the entire surplus were available for the budget, the vast majority of the structural problem would remain.

The gap is not caused by a single expenditure item. It is the result of several trends: rising subsidies for pension insurance, growing healthcare and long-term care costs, higher defense and security spending, increasing interest payments, investment needs, and policy commitments. At the same time, the tax burden is not to increase further, and regular borrowing remains limited. These goals cannot all be met simultaneously if economic and productivity growth is weak.

This leads to an uncomfortable truth: Germany cannot solve its budget problem solely through higher taxes, cuts, or additional debt. Higher taxes would further burden employment and investment. Across-the-board cuts could damage infrastructure, education, and security. Increasingly granting new borrowing exemptions would raise interest costs and increase future consolidation requirements. What is needed is a combination of growth-friendly tax reform, greater spending efficiency, clear prioritization, and reforms to the social security systems.

Social security systems are particularly crucial. Federal subsidies to the pension insurance system are growing because the number of pensioners is increasing while the number of contributors is decreasing relatively. Without adjustments to working life, labor force participation, immigration, contributions, or benefit dynamics, the federal budget will increasingly become a balancing mechanism. In such cases, social subsidies will crowd out both investments and tax relief. The tax question is therefore inextricably linked to the question of how Germany organizes its welfare state under changing demographic conditions.

Tax cuts must generate growth, not distribute windfall gains

Not every tax cut is automatically good economic policy. A debt-financed tax cut that primarily fuels additional consumption and barely increases production potential can create demand in the short term, but in the long term, it increases interest rates and debt. Furthermore, a blanket reduction without considering distributional and incentive effects can incur high costs without solving the core locational problems. Therefore, the quality of the tax relief is crucial.

Measures that accelerate investment, expand employment, and reduce bureaucratic costs are particularly effective. These include reliable depreciation rules, an internationally competitive corporate tax rate, improved loss carryforward provisions, tax incentives for research, and a lower marginal tax rate on additional labor. An income tax scale automatically adjusted for inflation could also prevent the government from regularly profiting from nominal wage increases and then presenting tax relief packages as voluntary acts of charity.

For businesses, the nominal tax rate is not the only relevant factor. Investment decisions also depend on energy prices, planning times, labor costs, regulation, digital administration, and the availability of qualified specialists. A corporate tax cut can therefore be beneficial, but it has little effect if permits take years or power grids are lacking. Tax policy must be an integral part of a comprehensive location strategy and should not be misunderstood as a substitute for structural reforms.

For private households, too, tax relief should aim to incentivize work. A flatter tax rate for low and middle incomes makes sense, but it is insufficient if social benefits abruptly disappear as earned income increases. The combined marginal burden of taxes, contributions, and benefit reductions can be significantly higher than the apparent income tax rate. Therefore, any reform should consider the tax and transfer systems together. Increased work must be clearly reflected in disposable income; otherwise, appeals for higher labor force participation will be ineffective.

The state needs a binding relief rule

The recurring debate after every tax revenue forecast follows a predictable pattern. If revenues are lower than expected, relief measures are postponed, citing budgetary risks. If they are higher, the additional revenue is considered already earmarked or offset by reduced borrowing capacity. This creates a fiscal one-way street for taxpayers: risks are immediately used to justify restraint, while positive surprises are rarely used to justify relief.

One way to solve this problem would be a binding rule for unexpected additional revenue. A fixed portion could be used for debt repayment, another for investments, and a third for tax relief. Such an allocation would have to be adjusted for cyclical fluctuations and based on actual, rather than merely estimated, revenue. It would prevent any improved forecasts from being entirely swallowed up by new spending, while simultaneously ensuring fiscal prudence.

Furthermore, every permanent new expenditure should be accompanied by a financing proposal. This requirement should not apply only to tax cuts. If a €5.4 billion reduction in electricity tax requires offsetting funding, the same must apply to additional social benefits, subsidies, or administrative projects. Fiscal symmetry means that spending requests and relief requests are evaluated according to the same criteria.

A spending rule could additionally ensure that federal consumption expenditures do not grow faster than nominal production potential in the medium term. Exceptions would be possible for clearly defined crises and investment projects. This would not automatically dismantle the welfare state, but rather create pressure to prioritize. Ministries would have to end ineffective programs before initiating new ones. Without such a mechanism, the temptation remains strong to treat rising tax revenues as a permanent invitation to expand government responsibilities.

Federal interests make a clear relief policy difficult

The additional federal revenue of €10.9 billion is distributed between the federal government, the states, and municipalities. The federal government therefore cannot dispose of the entire amount alone. At the same time, states and municipalities bear considerable expenses for education, internal security, administration, infrastructure, and social services. Despite rising federal revenues, many municipalities are under significant financial pressure because personnel, construction, and social welfare costs are increasing faster than their income.

This federal structure explains why a record national figure says little about the actual capacity of any single level of government to act. However, it also creates incentives to pass responsibility on. States demand relief from the federal government, such as a lower electricity tax, but are not required to fully finance it in their own budgets. The federal government, in turn, points to its own financial burdens, while many costly laws are implemented at the municipal level. Ultimately, citizens perceive one state, but rarely differentiate between the levels of government responsible for specific financial decisions.

Better fiscal policy therefore requires greater cost transparency. Every major tax change should clearly indicate which level of government will gain or lose revenue and how the measure will affect municipalities. The same applies to new service commitments. Those who decide on standards should, in principle, also be responsible for their financing. This would reduce the political temptation to claim advantages at one's own level and shift costs to other budgets.

This coordination is particularly important in the case of income tax reform because the federal government, states, and municipalities all share in the revenue. A tax relief of ten billion euros therefore affects more than just the federal budget. If the reform is to be sustainable in the long term, the federal levels must either accept corresponding revenue shortfalls or receive relief elsewhere. Otherwise, higher municipal fees or reduced investments are likely, indirectly negating some of the relief.

What a credible tax turnaround would have to contain

A credible tax reform should neither give the impression that all tax relief measures are self-financing, nor treat the current budget structure as immutable. The first step would be a binding tax relief for low and middle-income earners that goes beyond mere inflation adjustment. This should involve a joint reform of wage agreements, social security contributions, and benefit reductions. The goal should be to ensure that additional work generates visibly more disposable income.

The second component would be a more competitive corporate tax system. Germany needs lower effective tax burdens on reinvested profits, faster depreciation, and reliable rules across legislative periods. This could be partially financed by reducing small-scale subsidies and tax breaks. Crucially, the focus should not be on favoring companies across the board, but rather on promoting capital formation, research, digitalization, and productive investments.

The third component would be energy policy-consistent tax relief. The electricity tax should be gradually reduced for all consumers to the European minimum level, provided that a reliable offsetting measure is simultaneously adopted. A combination of phasing out conflicting energy subsidies, revenue from CO₂ pricing, and savings in ineffective support programs would be conceivable. This would make electricity, as a key energy source for the energy transition, cheaper without creating a new, permanent budget deficit.

The fourth component would be an expenditure review with real consequences. All major funding programs, subsidies, and administrative services should be regularly examined for goal achievement, windfall gains, and implementation costs. Programs without demonstrable benefit should automatically expire unless explicitly extended by law. Digitization should not only create additional portals but also simplify processes, retain staff, and reduce processing times.

The fifth component concerns social security systems. Without a higher employment rate, longer effective working lives, skilled immigration, and a limit on non-contributory benefits, tax and contribution rates will continue to rise. Reforms must be socially balanced but must not ignore demographic realities. Anyone who rejects any structural adjustment is effectively opting for higher burdens on future workers and less room for investment.

Why the government shouldn't sell the tax revenue forecast as a success

The new tax revenue forecast is better than a downward revision and prevents the need to close additional budget gaps for 2027. This is a stabilization, but not a breakthrough. A federal surplus of €4.1 billion is small in relation to total expenditures, planned borrowing, and the €28 billion shortfall projected for 2028. Anyone who derives a great success story from this is overlooking the scale of the structural problems.

However, it would be equally wrong to dismiss the additional revenue as insignificant. It demonstrates that even a slightly improved economic performance generates considerable fiscal effects. This is precisely the most important lesson: Germany cannot simply steer its budget problems away in the long term; it must grow its way out of them. Higher productivity, increased employment, additional private investment, and competitive energy prices are more sustainable than ever-increasing taxes.

The clear and well-founded perspective is therefore this: The finance minister is acting correctly by not prematurely allocating the entire 4.1 billion euros. However, he is acting too defensively by merely stating a lack of leeway instead of creating it through reforms. The chancellor is also taking a short-sighted approach by announcing a reduction in electricity tax without presenting a sound financing plan. One side is confusing caution with strategic planning, the other is confusing political intent with financial feasibility.

For citizens, the crucial questions are whether the announced income tax reform will actually take effect on January 1, 2027, whether its net relief will be maintained despite rising contributions, and whether the electricity tax can be credibly reduced. For businesses, the key is whether depreciation, corporate taxes, energy prices, and permitting processes will become more competitive in the long term. For the government, it must be ensured that increased revenue does not automatically create new, ongoing responsibilities.

Germany doesn't have an acute revenue problem. It has a problem with priorities, efficiency, and growth. As long as the government plans additional consumption taxes despite record revenues, takes on large new loans, and still finds little room for tax relief, skepticism isn't populist, but economically justifiable. The real success wouldn't be another record tax revenue forecast. The real success would be a budget that manages with existing revenues, protects future investments, and gives those who generate the tax revenue more leeway.

 

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