German finance minister sets out sweeping reform plans to boost growth

By Maria Martinez

BERLIN, March 25 (Reuters) - Germany's Finance Minister Lars Klingbeil on Wednesday proposed measures, including income tax reform and capping the excess profit of energy companies, to boost the sluggish economy, saying the country needed a new growth model.

"Whether Germany remains a strong country is up to us alone. We alone will decide that," Klingbeil said.

"We need technological leadership in key areas, competitive conditions for investment, a modern industrial base, secure supply chains, and functioning capital markets," he said.

Europe's largest economy has struggled to grow since the pandemic, as rising competition from China and higher energy prices have strained its export-driven economic model, with a renewed surge in energy prices due to the U.S.-Israeli war in Iran posing a further threat to recovery.

"President Trump's misguided policies are having a direct impact on people's wallets here," Klingbeil said.

The finance minister proposed a cap on energy companies' excess profits, with the proceeds to be used to fund relief for consumers, alongside a binding price cap.

Klingbeil, who is working on the 2027 budget, said the government's reforms will include fiscal consolidation, with a detailed analysis of revenues and expenditure.

INCREASING WORKING HOURS AND PRODUCTIVITY

Germany's labour market is suffering due to high levels of part-time work, incentives for early retirement and tax-transfer systems that in some cases discourage additional work, he said.

"I want us to create a system in which willingness to perform pays off," Klingbeil said.

Under new proposals, Germany will abolish the current income splitting system for married couples, which lowers taxes for partners with unequal earnings. In practice, the system raises the effective rate for the lower income earner, discouraging them from taking on more hours in a country where half of womenwork part-time.

It will only apply to future marriages.

He also called for changes in income tax that will deliver several hundred euros a year in relief to 95% of employees.

"Anyone who works hard and works more will finally have more money in their pocket as a result of this reform," the finance minister said, adding that higher earners and wealthy asset holders should shoulder more of the burden.

Klingbeil also called for private pension reform and for the introduction of a mandatory occupational pension scheme funded by employers and employees to encourage workers to stay longer on the job.

He said he favoured "radical cuts" to bureaucracy and less state control, coupled with tougher penalties for lawbreakers.

PROTECTING INDUSTRY

Klingbeil said targeted tariffs could be used to protect domestic companies and that strategic sectors should be subject to local content and "Buy European" requirements.

In areas where Europe has fallen behind technologically, foreign companies could be required to enter joint ventures with domestic firms as a condition for operating in the European market.

Klingbeil also said investment decisions must not be driven solely by short-term returns because that kind of behaviour costs jobs and erodes technological know-how.