How Germany cushions energy price hikes and inflation

Germany's federal government will spend €65 billion ($64.6 billion) in relief measures to help the population weather the current energy crisis and inflation.

"I am very pleased with the result," said Chancellor Olaf Scholz, who has been seeing his personal approval ratings plummet. "All of this together and many other measures will help us get through the winter together."

The governing coalition of center-left Social Democrats (SPD), environmentalist Greens, and neoliberal Free Democrats (FDP) presented their compromise on Sunday.

And here's what people can now expect.

• Energy allowance

The energy price allowance of €300, which is already being paid to all employees irrespective of their personal income in September, is to be extended to the country's 21 million pensioners. And the three million students at universities and technical colleges are to receive €200 each, including the 440,000 foreign students who live here. This money will be paid out on December 1, 2022.

• Housing allowance

More people in low-income households are to receive a housing allowance to help them pay for their accommodation. The number of recipients viable for this benefit is now to be increased from currently 640,000 to around two million. The threshold is determined regionally depending on the cost of living in respective areas, but so far it has been single-person households with an income below €1,000 per month, who could apply for this monthly allowance of roughly €195. Those already on state benefits — such as long-term unemployed or asylum seekers — are not eligible.

Housing allowance recipients will receive a second heating allowance. They had already been promised an initial one-off €270 by the end of this year — and the stipulations for who can apply were drafted in some detail: To qualify, they must have received or be receiving housing allowance for at least one month during the "heating season," between October 2021 and March 2022. In addition, job trainees and students who are dependent on state student loans, or other state benefits are to receive the subsidy.

Now there will also be a second heating allowance for housing benefit recipients: €415 for a single-person household, (or €540 for two people, and an additional €100 for each additional person), which will be paid out sometime between September and the end of December 2022.

After that, a heating allowance will be permanently integrated into the housing allowance.

• Child benefit

Parents in Germany already receive a tax-free monthly child benefit for each child. Again, this is staggered: For the first and second child, it is €219 per month, for the third child €225, and for each additional child €250. Once the child turns 18, this benefit can still be claimed until it turns 24, if the child is still at school, in vocational training, or studying. Now, this child benefit will be increased by €18 per month for the first and second child from January 1, 2023.

• 9-euro ticket

The federal government has said it is in favor of a nationwide subsidized ticket for local public transport. This follows the success of the €9 monthly pass that was sold 50 million times over three months this summer. The new ticket, however, will not be available for €9, but rather somewhere between €49 and €69 per month. The government is willing to pay €1.5 billion towards it — but only if the federal states contribute the same amount.

• Citizens' income

The government also announced how much the basic benefit for the long-term unemployed will be in the future. From January 1, 2023, the "Citizens' Income" (formerly known as Hartz IV) will rise by €50, bumping up the standard rate for single people from €449 to around €500. The standard rates for multi-person households and children will be adjusted accordingly.

• Tax reform

In Germany, those who earn more must pay a higher proportion of their salary in income tax. But the system goes up in steps, rather than in a steady curve. So if wages and salaries are increased for example to compensate for inflation, an individual can suddenly move into a higher tax category through this, which can eat up the entire pay increase and maybe even more than that. This tax increase is called "cold progression" and Finance Minister Christian Lindner's Free Democrats have vowed to fight it. Now the progression is being amended to prevent these sudden tax hikes. Around 48 million taxpayers will benefit from this.

Tax-free subsidies from employers:

If employers provide financial support to their employees to make up for their high energy prices, any such payments are to remain tax-free for up to €3,000.

No carbon tax hike:

Germany had imposed a new levy on fossil fuels as a measure to push savings on CO2 emissions and combat climate change. This will now not be raised as was planned from January 2023.

• A cap on electricity and natural gas price

Private households, as well as small and medium-sized enterprises, are to receive a basic amount of electricity at a discounted price. Anything above this basic consumption will have to be purchased at the current market prices.

The idea here is to provide financial assistance while maintaining the incentive to save electricity. How much energy will this "basic amount" be? How low will the discounted price be? That is still not clear.

How will this all be financed?

Finance Minister Christian Lindner is at pains to emphasize that although the package of measures includes €65 billion, only half of that will come from state coffers.

Billions are to come from taxing "windfall profits" made by energy companies in the current crisis. Electricity producers who use renewables or nuclear power have not seen the same production cost rise that electricity from natural gas has. But they have all been receiving higher rates, which has seen their earnings rise.

Price reform is also currently being discussed at the European level. Germany is part of an EU-wide electricity market and will find it hard to make any unilateral decisions. Critics point out that a national solution would hardly be possible as other EU countries would be able to buy up the subsidized electricity produced in Germany.

Either way, Lindner is adamant that from 2023 he will reapply the so-called debt brake, a fiscal rule enshrined in Germany's constitution designed to restrict structural budget deficits at the federal level.

Criticism of this third package of relief measures has been coming from the political opposition and a wide range of economists, who feel it benefits the wrong people; it is not enough; will adversely impact climate protection measures or it will be impossible to implement.

This article was originally written in German.

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