Posted on 06/30/2003 3:49:22 PM PDT by anymouse
Decision to bring forward $36 billion in tax cuts to next year could result in Germany busting deficit ceiling again
FRANKFURT - Desperate to revive Germany's moribund economy, Chancellor Gerhard Schroeder's government has approved plans to accelerate a sweeping tax cut, raising fears that Europe's largest economy will bust European Union (EU) deficit rules yet again.
Such chronic violations could have profound implications for the fiscal rules that govern Europe's monetary union.
The government's decision, reached at an unusual Sunday Cabinet meeting, would bring tax cuts scheduled for 2005 ahead by a year.
The government estimates that the cuts, which will now take effect next year along with other tax cuts, are worth 18 billion euros (S$36 billion).
'We want a signal of revival to go out from this weekend to the people in our country,' Mr Schroeder said at a news conference. 'The government is improving the conditions for more growth.'
Germany's economy has stagnated over the last year as consumers have doggedly refused to spend.
The proposed cut, which would reduce the top income tax rate from 48.5 per cent to 42 per cent, is designed to encourage consumption and benefit small and medium-sized companies.
Mr Schroeder said the tax cut would be financed by reductions in subsidies, possible revenue from the sale of stakes in state-owned companies and further government borrowing.
Despite borrowing more, Mr Schroeder insisted that Germany would be able to get back in line with the EU's limits on budget deficits.
Germany violated the deficit cap - 3 per cent of gross domestic product - last year, and is expected to do so again this year. Some economists predict that Germany will breach the deficit ceiling next year as well.
Mr Schroeder's move is nevertheless being applauded by economists and business leaders, who view the need to revive the economy as more pressing in the short run than keeping its books balanced.
German Finance Minister Hans Eichel said other European countries understood the need for his country to cut taxes to restore growth.
Germany is on the brink of its second recession since 2001, and as Europe's biggest economy, its woes have continentwide implications.
Even the president of Germany's conservative central bank, Mr Ernst Weltke, said he favoured the tax cuts.
'Everybody has always demanded that,' he told reporters on Sunday after a meeting in Basel, Switzerland.
Mr Weltke, who sits on the governing council of the European Central Bank, added: 'If bringing forward the tax reform doesn't mean the deficit will increase significantly, this is overall a good thing.'
For Mr Schroeder, cutting taxes is perhaps the least contentious part of his broader plan to reform the economy.
He has encountered fierce opposition from labour unions to his proposals to overhaul pension benefits and ease regulations on the hiring and firing of workers.
On Sunday, however, he got good news from Germany's biggest industrial union, IG Metall, which said it would suspend four weeks of strikes at a dozen production plants in eastern Germany.
The union had been seeking to shorten the work week in eastern Germany from 38 to 35 hours, bringing it in line with western Germany's.
But the strikes, which had forced BMW and Volkswagen to halt car production because of shortage of parts, won little public support. -- New York Times
Just for comparison, the top income tax rate in Singapore is 22%, scheduled to drop to 20% next year. I do not intend to invest in Germany any time soon.
As for encouraging consumption, a better idea might be to allow the stores to stay open when people are able to shop. (By law, all major stores are closed from 4 pm on Saturday until 9 am Monday)
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