German government heightens focus on rate cuts, tax incentives to boost construction
German Chancellor Olaf Scholz and Construction Minister Klara Geywitz voiced optimism on Friday (15 March) that falling interest rates and new tax incentives will revitalise the country’s crisis-shaken construction sector and boost overall economic growth.
Germany’s construction sector has been taking a hit in recent years, with the government’s target to build 400,000 new homes each year being missed substantially.
Only 300,000 new flats have been built annually between 2020 and 2022 – a figure that shrank further in 2023 to 260,100 new construction permits being approved – marking a 26,6% drop from the previous year.
“The situation is serious, the mood is even worse,” Geywitz (SPD/S&D) told a conference of the German Construction Industry on Friday.
However, government representatives tried to spark optimism, voicing hopes that falling interest rates and new tax incentives could revitalise investments in the sector.
“There is much to suggest that residential construction could now stabilise. Inflation has fallen significantly, and construction interest rates are falling with it,” Chancellor Scholz said.
“Not all building materials have become cheaper, but many have,” he added.
Geywitz underlined the importance of the construction sector for the overall economy, arguing that “construction investment in Germany accounts for 54% of all investment”.
“For anyone wondering how the economy can get going again, I say: The construction industry must get going again,” Geywitz said.
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Tax incentives blocked by federal states
Geywitz said a more expansionary monetary policy is poised to benefit the sector but would prove insufficient to shore it up unless paired with targeted tax cuts.
“Of course, we are hoping for interest rate cuts by the ECB”.
Nevertheless, she added that “it won’t work without tax cuts in the construction sector”, putting pressure on the governments of Germany’s 16 federal states (Länder), which are yet to adopt a draft law that would include tax incentives for investments into the construction sector.
The law, known as the Growth Opportunities Act, provides for €3.2 billion of tax incentives for investments in clean technologies, including in construction and machinery. A premium for investments into energy efficiency has been cut, however, leaving it at only half of the volume initially proposed in summer 2023.
The law has been blocked by the seven state governments led by conservative opposition parties CDU/CSU (EPP), who made their approval conditional on the government taking back some subsidy cuts for farmers, which were part of its reaction to the far-reaching budget ruling by the country’s constitutional court in November last year.
However, Kai Wegner (CDU/EPP), mayor of Berlin and thus one of the conservative state leaders, indicated at the conference that a compromise is within reach, adding that the tax incentives for the construction sector should be adopted at the next meeting of the Bundesrat, the parliamentary chamber representing the 16 states, on 22 March.
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Interest rates dragging on the construction sector
High interest rates have weighed down on the construction activity over the last few years, Robert Feiger, head of the German construction trade union IG BAU, said, pointing to the sector’s high dependence on debt financing.
“[If] financing costs suddenly quadruple, within what feels like milliseconds, then of course that has an impact,” Feiger said, referring to the increase of average interest rates for loans of 10–15 years having risen from around 1 percent in 2020 to 4 percent in 2023.
“So I can’t say that politicians are to blame.”
But “interest rates are already falling, even though the base rate has not yet been cut”, Feiger said, adding that “we will certainly see one or two interest rate cuts by the European Central Bank this year”.
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