German tax cuts introduced to stimulate economy, June 2003

German Chancellor, Gerhard Schröder, announced a series of additional income tax cuts on 29 June 2003 in an effort to stimulate Europe's largest economy, which shrank 0.2% in the first three months of 2003.

The tax cuts, worth more than €15 billion, were agreed by German cabinet ministers at a special weekend retreat as the German government tries to pull the country's economy out of a serious down turn which has led to three years of near-zero growth. Under the agreement, the third stage of tax cuts due to be introduced in 2005 will now be brought forward to 1 January 2004 when other cuts are scheduled to be introduced. Top income tax rates will fall from 48.5 per cent to 42 per cent, while the lowest will go from 19.9 per cent to 15 per cent. Chancellor Schröder has suggested that the tax cuts would on average reduce income tax bills by 10 per cent.

The German cabinet hopes that the cuts will encourage Germans to spend their extra monthly cash, thereby increasing consumption which could pull the economy out of the doldrums. As Gerhard Schröder put it:

'Ten percent less tax means 10% more consumption. This government is improving the framework for more growth in Germany, it's the signal that we want to send to consumers and business'.

According to the cabinet, the cuts will be financed by subsidy cuts, the sale of shares in ex-state monopolies and new borrowing. However, such moves are likely to be criticised by opposition politicians and the EU as Germany's budget deficit continues to exceed the limits set out in the EU's economic and monetary union rules. Current EU budgetary rules require that the Member States' budget deficit stays under 3 per cent of GDP but Germany exceeded this ceiling in 2002 and look set to do so again in 2003. Some analysts are even suggesting that Germany will breach the deficit limit again in 2004, which would have a serious effect on the EU's Stability and Growth pact and would leave Germany facing massive fines from the EU. Ahead of the cabinet's decision on tax cuts, President of the European Central Bank, Wim Duisenberg, suggested that the German government was heading in the wrong direction, saying 'German debts will rise even though they should be falling'.

Conservative leaders, who also recognise the need to boost the economy, have especially criticised the way in which the German government intends to pay for the shortcuts and Angela Merkel, leader of the opposition Christian Democrats, called the result of the weekend meeting 'hugely disappointing', adding that new borrowing was the wrong way to meet the tax shortfall. If the government is to alter the timetable for tax cuts, then it will need to win over the support of the Christian Democrat-led regional states in the upper house of parliament first.

Links:
German Government: Die Bundesregierung
	Homepage
	29.06.03:	Press Release: Federal Government decides to bring forward the third tax revision stage: Signal for more growth
European Sources Online: Financial Times:
	30.06.03:	Schröder strategy on shaky ground
	27.06.03:	Realism in Berlin
BBC News Online:
	30.06.03:	Germany bets on tax cuts
	30.06.03:	Germany set to defy EU on tax
European Sources Online: In Focus
	Germany and others warned over budget deficits, January 2003
	Eurozone interest rates unchanged, despite Germany's economic problems, January 2003

Helen Bower

Compiled: Monday, 30 June 2003

Background and reporting on the week's main stories in the European Union and the wider Europe.