Germany prepares for massive spending cuts

26th October 2005, Comments 0 comments

26 October 2005, BERLIN - Germany is gearing up for a massive cutback in public spending with official projections released Tuesday underscoring the grim state of the nation's creaking pension scheme.

26 October 2005

BERLIN - Germany is gearing up for a massive cutback in public spending with official projections released Tuesday underscoring the grim state of the nation's creaking pension scheme.

Government advisers believe that the pressure on the nation's pension system means that pension contributions will have to be hiked next year from 19.5 per cent to 19.7 per cent.

Meanwhile, Berlin has been forced to consider taking a 600- million-euro (719 million dollars) loan this year to ease the pressure on the system.

The state of the public finances has taken centre stage in talks between the Social Democrats (SPD) and the Christian Democrat- Christian Social Union (CDU-CSU) on forming a "grand coalition" government.

The left-wing SPD of outgoing Chancellor Gerhard Schroeder and the conservative CDU-CSU bloc led by Chancellor-designate Angela Merkel agreed at talks Monday to slash government spending by 35 billion euros (42 billion dollars) by 2007.

This, they hope, will bring Germany's deficit back into line with the three per cent rule for euro zone members.

The leader of Bavaria's arch-conservative CSU, soon-to-be Economics Minister Edmund Stoiber described the planned cuts as "the greatest act of budget consolidation in the history of the Federal Republic of Germany".

However, tensions have already emerged between the CDU-CSU and the SPD on where the axe might fall.

The CDU-CSU are to present Finance Minister-designate Peer Steinbrueck in the coming week with a list of possible cuts, amid warnings from the SPD that both sides must be prepared to compromise.

The cuts are thought likely to include reductions in Germany's generous social provisions.

Germany's six leading economic institutes last week warned the new government against trying to reduce the deficit by increasing revenue instead of introducing spending cuts.

One of the most controversial measures is likely to be a possible hike in Germany's sales tax, from 16 to 18 per cent initially, rising later to 20 per cent.

The drastic cuts are also likely to reductions in incentives for home buyers and slashed tax credits for commuters.

Merkel's CDU-CSU bloc has been forced to hold coalition talks with the SPD after both parties failed to secure a parliamentary majority in last month's general election.

Germany's deficit is expected to once again overshoot the permitted three per cent level this year, after a protracted period of stagnation and high unemployment.

Economists believe that the German economy will be lucky to grow by one per cent this year. Earlier this month, the German Economy and Labour Ministry said it expected gross domestic product to grow by 0.8 per cent in 2005 and 1.2 per cent in 2006.

DPA

Subject: German news

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