German tax cut gamble meets wall of scepticism

27th October 2009, Comments 0 comments

Under plans for the next four years finalised on Friday by Germany’s new government, the tax burden on families and workers will be eased by some 24 billion euros.

Berlin -- Doubts grew on Monday over the viability of the new German government's choice to rely mostly on tax cuts to boost the ailing economy, a gamble that will send its immense national debt soaring even higher.

Under plans for the next four years finalised on Friday by Angela Merkel's conservatives and her new pro-business partners, the tax burden on families and workers will be eased by some 24 billion euros (36 billion dollars).

The Bavarian sister party to the chancellor's Christian Democrats (CDU) rubber stamped the plans at a meeting on Monday, and the CDU followed suit later in the day. Their Free Democrat (FDP) partners did so on Sunday.

Merkel, 55, Germany's first chancellor from the former communist East and its first female leader, won a second term in general elections on September 27. She was due to be re-elected formally by MPs on Wednesday.

Merkel believes the tax breaks will speed up Germany's recovery from its worst recession since World War II, and that the economic growth the cuts will trigger will help cover the cost.

She has also promised to simplify Germany's complex taxation system, and to reform the country's loss-making health system, but concrete plans are yet to be hammered out.

And despite Germany's mammoth and growing debt mountain, the new government has yet to detail any major cuts in spending while Germany's nascent economic recovery remains fragile.

"We are focusing on growth, because growth is the way out of the crisis," Merkel said on Monday.

"We made the decision to take a path fully directed towards growth, with no guarantee at all that it will work, but which offers the chance that it will work. By saving, saving, saving I see no chance of success," she said.

Andreas Rees, an economist at Unicredit bank, agreed: "It does not make sense to cut public spending already next year when unemployment is expected to soar by at least 500,000."

Such a policy "would literally have been Russian roulette with possibly devastating effects on growth and employment," Rees said.

But it is far from certain that the plan will pay off.

"For the moment, the new government is going with tax cuts for families and employees. It is unclear when it will be firms' turn," Klaus Zimmermann, head of the economic institute DIW, told the Berliner Zeitung daily.

"If you are looking for families to boost consumption then one has to ask oneself whether families will actually spend more or whether they will save most of the money," Zimmermann said.

The tax cuts, as well as increases in spending because of the recession, will also serve to add to Germany's huge debt mountain, putting it in breach of EU rules for several years to come.

Wolfgang Schaeuble used his first interview since being named Germany's new finance minister to describe Germany's debts as "exorbitant" and to rule out a balanced budget before 2013.

And even if the tax cuts succeed in boosting growth, economists say that it will be insufficient to make inroads into bringing the country's debt back to manageable levels.

"If Germany wants to reduce its public debt level to 60 percent (of output) by 2020 (in line with EU rules) ... the economy has to grow by 4.5 percent on average each year," Unicredit's Rees said.

"It goes without saying that this is a mission impossible."

French President Nicolas Sarkozy, who has also cut taxes despite the fact that his country's public finances are in an even worse state than Germany's, congratulated Merkel.

Said Sarkozy: "I am happy that Germany has made the same choice."

Simon Sturdee/AFP/Expatica

0 Comments To This Article