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Business

German Government Accelerates Tax Cuts to Boost Economy

Germany's cabinet approved pushing forward tax cuts. Taxpayers will save €18 million, which the government will have to offset.

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Having a chuckle: Chancellor Schröder (right) and his cabinet spent the weekend in the countryside discussing structural reforms

Chancellor Gerhard Schröder said on Sunday his cabinet had agreed to push forward tax cuts worth €18 billion ($20.5 billion) to inject life into Germany's sluggish economy.

"We want a signal of revival to go out from this weekend to the people in our country," Schröder told a press conference. "This government is improving the conditions for more growth in Germany."

The government plans to lower income tax levels by 10 percent from 2004, which will leave a €18 billion in federal, state and town coffers. Schröder said the cuts would be paid for by reducing subsidies, privatization revenues and increased state debt. Subsidies alone would be reduced by €45 billion by 2010, he said.

Speaking at the end of three days of talks among cabinet members and leading Social Democrats and Green Party leaders at Neuhardenberg Palace outside of Berlin, the chancellor said reforms don't always hurt, they also pay off.

Encouraging growth

The cuts are meant to help revive growth in Europe's biggest economy. Germany has experienced little growth in the past three years and unemployment has reached 4.45 million.

The tax cuts will lower the bottom rate of income tax from 19.9 percent to 15.0 percent. The top rate will decrease from 48.5 percent to 42.0 percent. The cuts were originally planned for 2005 as the final step in a three-phase income tax reform.

The additional €18 million burden is likely to push the federal budget beyond constitutional limits that require investments to exceed deficit spending for the third successive year.

Both Schröder and Finance Minister Hans Eichel said the government would aim to abide by European Union agreement that stipulates euro zone members must keep their budget deficit below 3 percent of gross domestic product. Germany overshot the limit in 2002 and is expected to do so this year as well.

Approval in doubt

If the Bundesrat -- which represents the states -- approves the plan, German taxes will be reduced by a total of €25 billion in one fell swoop in 2004, when the second tier of tax reforms, worth €7 million, will go into effect as well. Small- and middle-sized businesses and private households would save €10 billion, Schröder said.

But things may not go the government's way. Opposition leaders have rejected the plans. Christian Socialist head Edmund Stoiber, who is also Bavaria's premier, said the opposition-controlled Bundesrat would not approve of pushing forward the tax cuts. The Christian Socialists and their larger sister party, the Christian Democrats, wanted to offer people tax relief, but it "must be accompanied by serious policies," Stoiber told ARD television on Sunday. Stoiber and Christian Democrat head Angela Merkel both said the cuts should not be financed by higher debt.

But Free Democratic Party leader Guido Westerwelle said he supported Schröder's plans, though he opposed increased debts. "We are part of five state governments. We won't allow a blockade in the Bundesrat," Westerwelle stressed. The head of the business-oriented party shares power with the Christian Democrats in almost one-third of Germany's 16 states.

Now Finance Minister Hans Eichel may be under additional pressure to rework the 2004 budget proposal he presented on Thursday. He only has a few days to make changes to account for pushing forward the tax reform plans. The cabinet is due to adopt his budget on July 2.

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