German government agrees to hike VAT to 19pc

22nd February 2006, Comments 0 comments

22 February 2006, BERLIN - The German cabinet agreed Wednesday to a sharp rise in the country's consumption tax as part of plans to slash the budget deficit in Europe's biggest economy.

22 February 2006

BERLIN - The German cabinet agreed Wednesday to a sharp rise in the country's consumption tax as part of plans to slash the budget deficit in Europe's biggest economy.

The highly unpopular increase in the consumption tax from 16 per cent to 19 per cent is due to be introduced in January next year and has been roundly criticized by the nation's hard-pressed retailers as placing at risk the economic growth rate.

Finance Minister Peer Steinbrueck confirmed Berlin's decision to go ahead with the hike in consumption tax when releasing details of the 262 billion euros (311 billion dollars) draft budget for 2006.

Speaking in Berlin, Steinbrueck said the new budget would help to shore up economic activity in Germany and consolidate the country's state finances.

"We are entering a consolidation phase," he said, with the government planning to cut the budget deficit to below three per cent by next year.

Steinbrueck said he expected the budget deficit to come in at 3.3 per cent this year, which means that the deficit will overshoot the three per cent deficit rule for eurozone member states for the fifth year in a row.

Data released Wednesday by the Federal Statistics Office showed the German deficit also coming in at 3.3 per cent last year, which was lower than its previous projections of a 3.5 per cent deficit.

In addition, Steinbrueck wants to cut net debt from 38.3 billion euros this year to 22 billion euros in 2007 and to 20 billion euros in 2009.

The increase in the consumption tax will generate about 20 billion euros in revenue annually.

A large part of the revenues resulting from the tax increase has been earmarked to reduce new borrowing, but the money raised is also to help fund a two percentage point cut in payroll taxes paid by employers and employees.

The government argues that this will help to lower labour costs, and as a result will underpin both economic growth and job creation.

Many economists believe that the planned rise in the consumption tax will help to boost household spending this years as consumers bring forward purchases as ahead of the proposed VAT hike.

They are concerned that private consumption could slump again after the increase is introduced.

Weak private consumption has been a major factor is slowing Germany's recovery from a protracted period of stagnation.

DPA

Subject: German news

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