Merkel under fire for German tax cut plans

4th November 2009, Comments 0 comments

The German leader intends to pay for upcoming tax cuts by borrowing more, which critics say will throw the country's reputation for fiscal prudence out of the window.

Berlin -- Chancellor Angela Merkel, sworn in for a second term last week, is coming under pressure from all sides over her plans for Germany to borrow its way out of its worst recession since World War II.

Merkel, 55, was re-elected to a second four-year term on September 27, ditching her centre-left coalition partners, the Social Democrats (SPD), in favour of a new tie-up with the pro-business Free Democrats (FDP).

The new government plans 24 billion euros (35 billion dollars) in tax cuts from 2011, in addition to cuts worth around 21 billion euros worth agreed in Merkel's first term that are due to take effect from 2010.

An opinion poll over the weekend indicated that Germany's 62 million voters are impressed, with 74 percent of those surveyed saying they are in favour and 54 percent believing that more cuts should follow.

But Merkel intends to pay for the tax cuts by borrowing more, adding to Germany's 1.5-trillion-euro debt mountain and so, critics say, throwing the country's reputation for fiscal prudence out of the window.

According to forecasts given in July, Germany's budget deficit is set to reach 3.7 percent of gross domestic product (GDP) this year, six percent in 2010, five percent in 2011 and four percent in 2012.

Its total, cumulative debt pile is set to equal 74 percent of GDP in 2009, climbing to 82 percent in 2012 and 2013, putting Europe's biggest economy in breach of European Union rules that it was at the forefront of creating.

The EU's Growth and Stability Pact states that a member's annual budget deficit cannot exceed three percent of GDP and that its total debt cannot be more than 60 percent of GDP.

Merkel has ruled out large cuts in public spending to help cover the cost, saying this might endanger Germany's fragile recovery, and that the growth that the tax cuts will trigger will help balance out the books.

"In such a unique economic crisis the state must do the little that it can do to boost growth, financed by higher debt," Wolfgang Schaeuble, Merkel's new finance minister, told Stern magazine last week.

"We will closely follow how the banking and financial crisis develops in Germany and in the wider world, and we will only begin with (fiscal) consolidation when we can afford to," her spokesman Ulrich Wilhelm said on Monday.

The strategy has drawn fire both at home and abroad.

Horst Koehler, a former head of the International Monetary Fund and now holder of the mostly ceremonial post of German president, said Germany "has to reduce the national debt" and warned against "unrealistic growth expectations."

Over the weekend, even the head of Germany's powerful main employers' federation, the BDI, said that Merkel was being overly cautious about the economy and that debt needed to be cut.

"We need an exit strategy ... Billions more in debt means higher and higher interest payments and that the financial room for manoeuvre will get ever smaller," BDI head Hans-Peter Keitel told Focus magazine.

Axel Weber, head of the Bundesbank central bank, was quoted as saying last week that Germany should bring its budget deficit below three percent, within EU limits, in 2012.

Jean-Claude Juncker, chairman of the 16-nation eurozone and a candidate to become the EU's first full-time president, said last week that Germany's debt mountain was "excessive and scarcely bearable for the next generation."

Comments from certain state premiers -- some of them from Merkel's party -- indicate that her programme may have a rough ride through the upper house of parliament, the Bundesrat.

There is concern that Germany might inspire other European countries, many of whom already run larger deficits -- Italy's debt is set to hit 116 percent of GDP in 2009 -- to throw caution to the wind.

Schaeuble admitted as much on Monday: "If Germany does not take the (European stability) pact seriously, then we would really have a problem in Europe."

Simon Sturdee/AFP/Expatica

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