Germany should raise its property tax, cut social welfare contributions and invest more to reduce income inequality, according to the IMF. The demands are contentious in an election year.

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The International Monetary Fund is calling on Berlin to combat inequality within Germany and encourage more “inclusive growth” across the country, Handelsblatt has learned.

The new call comes from the IMF’s annual consultations with Berlin on the health of its economy, according to several people familiar with the IMF’s preliminary report, which will be presented on May 15.

The IMF has long called on Germany to increase domestic spending to reduce its massive current-account surplus, but the new report focuses more on imbalances within the country. Among other things the IMF is calling on Germany to reduce the high tax burden on lower earners and to raise property or wealth taxes to compensate. Increasing infrastructure investments is also a top priority, the people familiar with the IMF report told Handelsblatt.

The report is a shot in the arm for Martin Schulz the Social Democrat who is campaigning on a pro-equality platform in the upcoming federal elections in September. Mr. Schulz is the main rival of Chancellor Angela Merkel, who is running for a fourth term for her Christian Democratic Union party.

The IMF sees public investment, especially in infrastructure, as the top priority for the next German government.

The IMF ideas are strongly in line with a "ten-point plan" that the Economics Ministry, led by Social Democrat Brigitte Zypries, presented a few weeks ago that focused on the idea of inclusive growth.

The Economics Deputy Minister Matthias Machnig, also a Social Democrat, told Handelsblatt that he supported the IMF recommendations that Germany “consistently use existing budgetary latitude for future investments and initiate further reforms to achieve inclusive growth."

Whether the IMF will explicitly demand Germany cuts social security taxes in its final report has not yet been decided, the sources told Handelsblatt. The IMF fears that this could be seen as too strong an interference in Germany's parliamentary election campaign. But in their discussions with representatives of the German finance ministry and the central bank, or Bundesbank, last week and this week, the IMF economists repeatedly found fault with what they believe is too high a burden, especially for people with lower incomes.

In its report, the fund aims to at least describe the problem. Speaking off the record, IMF insiders are even more direct, saying that Germany, given its strong financial position, has room for relief. The debt brake has made an important contribution to consolidating budgets.

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Finance Minister Wolfgang Schäuble has established reserves of nearly €19 billion ($20.7 billion) in the federal budget and the finance ministry is assuming there will be additional government revenues of €55 billion by 2020, compared with previous estimates.

The IMF is puzzled by the fact that the tax revenues are so much better than expected once again, leading its economists to ask the German officials if they were not systematically underestimating tax revenues.

The problem with Germany, according to the IMF, is that despite its relative prosperity, the tax burden on Germany falls disproportionately on lower earners. It points out property owners in Germany for example are taxed relatively lightly, and has asked Germany to explain why property tax is not progressive, that is, increasing with higher incomes.

The IMF sees public investment, especially in infrastructure, as the top priority for the next German government, and suggests the country simplifies its regulatory framework, to free up the bottlenecks that mean billions in federal subsidies have gone unused.

Germany still has room for more generous wage agreements, the IMF representatives said in their discussions, adding that it would not lead to inflation as the core inflation rate – that is, not including price increases in food and energy – still lies at only about 1 percent.

But not all IMF proposals will appeal to the Social Democrats. Mr. Schulz wants to extend the length of time older workers can claim unemployment benefit, reversing cuts made by the Hartz welfare reforms more than a decade ago. The IMF said the reforms made an important contribution to Germany's current record employment level, and instead of being reversed, both the labor market and the service sector need to be further liberalized.

IMF demands to reduce inequality will probably fall on deaf ears in Germany's finance ministry whose head, the Christian Democrat Wolfgang Schäuble, is one of Ms. Merkel's closest allies. The finance minister doesn’t view inequality as too high in Germany. Measured by net income, the country is positioned in the middle compared with other countries, and income inequality has not increased over the past 10 years, according to the ministry.

Martin Greive is a correspondent for Handelsblatt based in Berlin. To contact the author: [email protected]