Schroeder watersdown tax plan

15 December 2003

BERLIN – After 10 hours of tough talks, Chancellor Gerhard Schroeder stitched up a deal early Monday with Germany’s opposition premiers to introduce tax cuts in 2004 and usher in long-term economic reforms.

Schroeder voiced disappointment at a 3:30 a.m. news conference in Berlin’s Bundesrat building but indicated he could work with the agreement reached with the leaders of Germany’s Christian Democrat-led opposition.

“All in all, we consider this result is naturally not all we could have wished for, Schroeder said. “But it is really an absolutely respectable result that we can accept and that in the current conditions can bring our country further.”

He went on to say: “When the power constellation is the way it is currently, you have to take what you can get.”

The agreement means 12 bills that had been in legislative limbo can be passed into law after a major rewriting of Schroder’s original reforms meet certain conditions laid down by the opposition.

Schroeder had staked his political future on his package of welfare and labour market reforms aimed at shoring up growth in Europe’s biggest economy.

Parliament is expected to approve the new reforms, which have been stalled in the opposition- controlled upper house, on Friday.

Under Schroeder’s deal with the opposition, taxes will be reduced from 1 January but by less than Schroeder had hoped.

Top earners who currently pay 48.5 percent in tax on the last euro earned will see the rate fall to 45 percent rather than the 42 percent wanted by the Schroeder government.

The tax cuts will cost EUR 7.8 billion, instead of the EUR 15.6 billion sought by Finance Minister Hans Eichel. The rest of Eichel’s tax reform plans are to be delayed until 2005.

Christian Democrat leader Angela Merkel said she was “very satisfied”, which include plans to be make it easier for companies with up to 10 employees to dismiss staff.

She called the settlement a compromise “between the desirable and the do-able”.

Edmund Stoiber, the leader of the Christian Democrat’s associate party, the Christian Social Union said the opposition had ensured that no more than a quarter of the financing for the tax cuts would be financed by borrowing and forecast that the labour-law changes would create “hundreds of thousands of future jobs”.

The closed-door talks had begun at late Sunday after several rounds of cross-party negotiations of a special committee aimed at breaking the deadlock between the two houses of parliament proved fruitless.

Schroeder had staked his political future on the introduction of his so-called Agenda 2010 reform plans aimed at helping the Germany economy to remain on the path to recovery.

The government has been advertising Agenda 2010 by distributing millions of little red books explaining the details. Most Germans say they do not understand the proposals, but just wish their leaders would do something to end the economic downturn.

The Social Democrat and Greens government won approval for the package of measures in parliament’s lower chamber, the Bundestag, but the CDU/CSU opposition in November blocked the legislation in the Bundesrat, which represents the states.