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Berlin rules out tax hikes to plug deficit

7 May 2004

BERLIN – The German government Friday said there would be no “spectacular changes” to its reform plans as it seeks a way to raise revenues, plug a budget deficit and speed up economic growth.

As a result of the slow pace of economic recovery, high unemployment and loss of tax revenues, economic experts says Germany is facing a budget gap this year of between EUR 15 and 20 billion.

But leaders of the coalition of Social Democrats (SPD) and Greens have also ruled out increasing value added tax (VAT) as one way of helping to keep the budget deficit down.

SPD chairman Franz Muentefering said raising VAT was not an option for the government and that there were no grounds to make “spectacular changes” to spending plans.

The government is to wait until Finance Minister Hans Eichel reports next Thursday on the state of the budget and the government’s projected tax revenues before making any firm decisions.

Muentefering said Eichel, who is facing mounting criticism over Germany’s budget crisis, had “the full confidence of the coalition”.

Greens party chief Reinhard Buetikofer also ruled out any u-turns on the government’s spending plans. Instead, the government intends to scrap some subsidies, diverting the money to foster education and innovation programmes.

Chancellor Gerhard Schroeder last week denied the government was changing its course on welfare and other reforms amid increasing concerns in Berlin that spending cuts were stifling economic recovery.

Reports this week said Eichel had called for a radical financial programme including increasing VAT from today’s 16 percent by up to 5 percentage points.

The increase would raise EUR 45 billion, enough to keep the 2005 budget deficit below 3 percent of gross domestic product and abide by the growth and stability pact rules for euro-member states.

The government is reportedly concerned about weak domestic consumer confidence as the economy struggles to pick up. Most of the current modest growth is being driven by global demand for German exports.

Germany’s six leading economic research institutes have scaled back their 2004 growth forecast amid weak consumer demand and high unemployment, predicting an economic growth rate of 1.5 percent for this year and 2005.


Subject: German news