Germany’s Merkel defends tax-cut plan from attacks

By Reuters Staff
October 26, 2009

Leader of the German Free Democrats (FDP) Guido Westerwelle and German Chancellor and head of the conservative Christian Democratic Union (CDU) Angela Merkel chat as they sign the agreement for a coalition government during a contract signing ceremony in Berlin October 26, 2009. REUTERS/Fabrizio Bensch (GERMANY)   By Madeline Chambers
BERLIN, Oct 26 (Reuters) – German Chancellor Angela Merkel defended on Monday her plans to pursue billions of euros in tax relief in the face of rising debt, saying the tough savings course favoured by her critics would damage a fragile recovery.

Merkel agreed a policy blueprint with the pro-business Free Democrats (FDP) on Saturday, including 21 billion euros of tax relief for 2010, made up partly of corporate and inheritance tax reforms, and 24 billion euros of income tax relief from 2011.

It is unclear how her new government will fund the tax relief and her new finance minister Wolfgang Schaeuble has already said he cannot guarantee the cuts will happen given Germany’s shaky finances — a sign of divisions even before the new government has taken over.

In a speech to party members, Merkel dismissed criticism, saying tax relief was the only responsible option for an economy that is only beginning to emerge from its worst downturn since World War Two.

“We have chosen a path that focuses fully on growth,” Merkel told party members. “There are no guarantees it will work, but it gives us a chance. A path of saving, saving and more saving would offer us no chance.”

Merkel’s tax cut plans are likely to please Washington and some European governments which had feared Germany, Europe’s biggest economy, might step on the stimulus brake too soon.

Her outgoing government insisted repeatedly that countries begin thinking about “exit strategies” and that fellow EU countries move fast to get their finances in order, but Merkel was adamant on Monday that now was not the time for spending cuts, even if it meant higher debt levels.

“We have to learn something from history. In the first big global crisis, we began saving too early … that led to results I don’t want to repeat,” she said.

FRAGILE RECOVERY
Some German commentators have expressed concern about the prospect of a ballooning budget deficit and unions have said the deal will not solve Germany’s economic problems.

Merkel has also faced jibes from within her own party. Josef Schlarmann, representative for small and medium-sized firms in Merkel’s Christian Democrats (CDU), attacked the pact for being too timid to give Germany the boost it needs.

“The coalition deal is not a reform agenda,” Schlarmann told Deutschlandfunk radio. “The question arises whether the planned steps are enough to give impetus to economic growth.”

The CDU premier of the eastern state of Saxony-Anhalt said he was not sure the tax plans would get the required backing in the Bundesrat upper house.

He, along with other regional politicians, are worried already-strained state finances could be savaged by tax cuts.

But several economists praised the plans.
“Overall, this coalition deal is a positive,” said Goldman Sachs economist Dirk Schumacher in a research note.

“The new government will reduce the tax burden in the coming two years thereby supporting the recovery,” he said, adding that new rules limiting debt will force the government to pursue an aggressive budget consolidation course from 2012.

“Tax cuts now and consolidation later is the right order given the current macroeconomic background,” said Schumacher.

The new parliament convenes on Tuesday, exactly one month after Merkel won the centre-right majority she had hoped for in a federal election. The new government is due to be sworn in on Wednesday. ((For stories on the coalition policies and personalities, click on [ID:nLN670345]))
(Editing by Noah Barkin) ((madeline.chambers@reuters.com; +49 30 2888 5230; Reuters Messaging: ann.chambers.reuters.net@reuters.com))

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