Marcel Fratzscher, president of the German Institute for Economic Research, predicts that the governing coalition of CDU/CSU and SPD will raise the standard VAT rate from 19 to 21 percent. This decision is said to be driven by the need to plug a huge gap in the federal budget, estimated at over 130 billion euros between 2027 and 2029. Although politicians have drawn their red lines, according to the expert, they will choose the easiest fiscal path.

VAT Rate Increase

A tax increase from 19% to 21% is forecast, which is expected to generate an additional 30 billion euros in budget revenue annually.

Huge Budget Gap

The government must find a way to cover a deficit of 130 billion euros planned for the years 2027–2029.

Coalition Strategy

According to Marcel Fratzscher of DIW, the CDU/CSU and SPD parties will choose the simplest political solution instead of difficult reforms.

The president of the German Institute for Economic Research (DIW), Marcel Fratzscher, warns of an impending tax policy amendment in Germany. According to his forecasts, the governing black-red coalition will decide to raise the standard VAT rate by two percentage points. This would mean an increase from the current 19% to 21%, which is expected to bring the state treasury an additional 30 billion euros annually. Fratzscher argues that such a step will be a "convenient way out" for politicians in the face of the state's growing financial problems. In 2007, Angela Merkel's government implemented a historic VAT increase from 16 to 19 percent, which became one of the most important turning points in German fiscal policy after the country's reunification.The main motive for the planned changes is a massive gap in the federal budget, which from 2027 to 2029 is estimated to exceed 130 billion euros. The expert points out that both coalition parties have outlined their non-negotiable boundaries and show no willingness to compromise in other areas, making a broad tax increase the most likely scenario. Notably, 2026 began with a VAT reduction for the catering industry, but according to Fratzscher, this was merely an exception that will not reverse the overall upward trend. 30 mld € — annual revenue from higher VAT In the opinion of the DIW head, although there are other, more economically optimal solutions, the government will choose the path of least resistance. Raising the consumption tax will directly hit citizens' wallets but will allow for quick stabilization of public finances without the need for painful cuts in social or investment spending. This situation sheds new light on the stability of the German economy, which is facing structural challenges and the need to finance ambitious transformation projects. „We must assume that the coalition will ultimately make things easier for itself: it will raise VAT by two points, which would yield an additional 30 billion euros.” — Marcel Fratzscher Forecast Changes in VAT Rates in Germany: Standard VAT rate: 19% → 21%; Budget revenue (annually): - → +30 billion euros; Budget gap (2027-2029): 130 billion euros → deficit reduction

Mentioned People

  • Marcel Fratzscher — President of the German Institute for Economic Research (DIW) and professor of economics at Humboldt University in Berlin.