Schroeder calls for tax cuts,announces EUR 2bn package

17th March 2005, Comments 0 comments

17 March 2005, BERLIN - German Chancellor Gerhard Schroeder called on Thursday for corporate tax cuts and a multi-billion euro road and rail spending package aimed at trying to ease Germany's record unemployment.

17 March 2005

BERLIN - German Chancellor Gerhard Schroeder called on Thursday for corporate tax cuts and a multi-billion euro road and rail spending package aimed at trying to ease Germany's record unemployment.

"We are in a really difficult situation with the jobless figures - unemployment is the top problem in our nation," admitted Schroeder in his widely awaited remarks to Berlin's parliament, the Bundestag.

German unemployment last month hit 12.6 percent with 5.2 million people jobless - the highest rate since Adolf Hitler took power in 1933. In some economically hard hit parts of former communist east Germany the rate is a grim 30 percent.

In a bid to stimulate hiring, the Chancellor proposed trimming corporate income tax to 19 percent from 25 percent.

Business leaders have been calling for a reduction of at least 10 percentage points from their overall tax burden, which is about 39 percent after other taxes are added on.

The move is also aimed at helping Germany better compete with east European states which have introduced radical tax cuts in past years leading many German companies to invest in new low-cost European Union members such as Poland and the Czech Republic.

Schroeder also announced his centre-left government would pump EUR 2 billion of public funds into highway and railway building.

A EUR 250 million package of direct aid to long-term unemployed was also unveiled in Schroeder's speech.

Seeking to boost state revenue, Schroeder called for eliminating a tax subsidy for private home builders. This, he said, would yield EUR 300 million next year and ultimately EUR 6-8 billion which should be spent on research and development and education.

Other proposals announced by Schroeder in his speech include:

- Increasing the write-down on local taxes for small and medium- sized companies to 2 percent from the present 1.8 percent for federal income tax. This will provide about EUR 500 million in tax relief, the government says.

- Loans at 2 percent less than the commercial rate for small businesses from the federal government's Mittelstand Bank.

- Extending federal subsidies to home-owners for installing energy-saving insulation through 2007 worth EUR 720 million.

- Slashing bureaucracy linked to the private sector including the elimination of 300 "superflous" laws.

- Creating by 2007 a system to register companies via the Internet which will reduce the time needed to do so to a few days compared with one month at present. Instead of dealing with different state agencies, people setting up new companies in Germany will in future have "one-stop-shops" for all dealings with government.

- Sweeping reform of Germany's state nursing care insurance system which ran up a deficit of about EUR 900 million last year.

Schroeder stressed there could be no talk of ditching the European welfare system which is dear to his Social Democratic Party (SPD).

"It would be a big mistake to throw overboard the principles of the social welfare state due to short-term interests," said the Chancellor to applause from government benches.

For his tax cuts and other measures Schroeder needs the backing of Germany's opposition conservatives who control parliament's upper chamber, the Bundesrat.

The German leader is due to meet later on Thursday with opposition Christian Democratic Union leader Angela Merkel and Christian Social Union (CSU) leader and Bavarian Prime Minister Edmund Stoiber.

Merkel, in a speech following Schroeder, accused the chancellor of merely tinkering with reforms and failing to push through a major structural overhaul.

She welcomed Schroeder's comments on cutting corporate income tax but underlined that the opposition would insist on knowing how the state would deal with reduced revenues.

But Merkel warned the CDU was unwilling to give up the house building subsidy.

Analysts warn that Schroeder's past and coming reforms will only have an impact in Germany in the long-term and that there is no fast cure to the current jobs misery.

"It's a long haul," said Adolf Rosenstock, a European economist at the Frankfurt-based office of Nomura International, adding: "It could take years, if not decades."

Rosenstock insisted that Germany had a generally business friendly environment in the wake of Schroeder's past tax cuts and social welfare reforms.

He underlined that given the workings of Germany's corporate tax system, the effective rate was actually far lower than the headline 39 percent on the books.

The biggest problem in Germany, he said, was curing the gloom cycle which has depressed key domestic spending for the past decade.

Germany's economy, which grew by 1.6 percent last year after three years of stagnation, is slowing with most economists predicting between 0.6 and 1 percent growth for 2005.

The government, however, is sticking to its projection of 1.6 percent GDP growth this year amid a continued surge of exports, rising corporate profits and a strong increase in output in January.

Schroeder's jobs creation package is seen as a last-ditch bid to show the government is serious about bringing down unemployment before general elections next year in which the German leader is seeking a third term for the centre-left alliance of his Social Democrats (SPD) and Greens.

The Chancellor's high-profile jobs speech is also linked to the faltering regional re-election bid of the Chancellor's SPD in the key state of North Rhine-Westphalia on 22 May.

Defeat of the SPD-Greens coalition in North Rhine-Westphalia - a working class SPD stronghold for decades - would send out shock waves and could cripple Schroeder's 2006 re-election bid, analysts say.

Unsurprisingly, many of the funds for government infrastructure projects - especially highways - were earmarked for North Rhine-Westphalia in Schroeder's speech.

Meanwhile the European Commission on Thursday welcomed Schroeder's proposals, saying the initiative would spur growth and jobs in the country.

Commission spokeswoman Amelio Torres described Schroeder's proposal for trimming corporate income tax to 19 percent from 25 percent as a "good" move.

The Commission, the European Union's executive arm, was "reassured" that the Chancellor's proposals would be "neutral" in terms of their impact on Berlin's budget deficit since it would be based on a "larger tax base," Torres said.


Subject: German news

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