Potential abolition of electricity tax breaks may negatively impact national economic growth.
The German government's recent decision to forgo a broad reduction of electricity tax for households has sparked debate and economic speculation, with the ifo Institute predicting a potential impact on the country's economic growth.
The ifo Institute, a renowned economic research institute, anticipates that the German economy's gross domestic product (GDP) growth rate may decrease by 0.1 percentage points due to the non-reduction of electricity tax. This comes after the Institute forecasted a growth of 1.5 percent for 2026 and a more modest 0.3 percent for this year, following a slight contraction in the previous two years.
The decision was primarily driven by budgetary concerns and the goal of maintaining fiscal discipline. German Chancellor Friedrich Merz, in defending the decision, emphasised the need for competitive industry companies in Germany that can withstand global challenges. His focus in the decision was primarily on relieving the manufacturing industry in Germany.
The coalition committee decided to bring forward the increase in the mother's pension, which the CSU had demanded, from 2028 to 2027. However, the same committee did not agree on a reduction of the electricity tax also for households last week.
The exclusion of households from the tax cuts means continued higher electricity costs relative to industry, which could slow adoption of electric heating and electric vehicles, potentially impeding Germany’s climate goals in heating and transport. Consumer groups, climate activists, and some energy companies have criticized the government for breaking promises and favoring wealthier consumers and businesses at the expense of ordinary households, which could exacerbate economic inequality and public discontent.
German Chancellor Friedrich Merz defends the decision to partially reduce the electricity tax, suggesting that if more financial room for maneuver becomes available, consumers will also be relieved with the electricity tax. Merz does not mention 2027 as a target date for further electricity tax relief for consumers.
The ifo Institute finds it difficult to quantify the growth losses that could result from lost trust due to the non-reduction of electricity tax. If these expectations are disappointed, households and companies may postpone their consumption and investment expenditures, further dampening the recovery of the economy. The Institute estimates that the missed electricity tax reduction for private households will result in a loss of around five billion euros.
The German government's decision balances fiscal constraints and industrial competitiveness but risks social backlash and slower progress on household energy transition measures. As the economy recovers, the government will need to navigate these challenges to ensure a sustainable and equitable growth trajectory.
The ifo Institute has stated that the German economy's growth rate may experience a slight decrease due to the non-reduction of electricity tax, as the institute predicts a potential reduction of 0.1 percentage points in the country's GDP. This decision, driven by budgetary concerns, may inadvertently slow down the adoption of electric heating and electric vehicles, potentially impacting Germany’s climate goals in heating and transport.
The German government's decision not to extend the electricity tax reduction to households may lead to continued higher electricity costs for households, which could widen the economic gap between wealthier consumers and businesses and ordinary households, potentially fostering discontent among the public.
