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Business

Germany's 2004 Budget Plan Raises Eyebrows

German Finance Minister Hans Eichel revealed his budget proposal for 2004 this week, but the head of the European Central Bank warns that Germany is charting the wrong course.

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German Finance Minister Hans Eichel calls for cuts in benefits and subsidies to balance the budget.

Germany's Finance Ministry presented the first comprehensive draft of its €251 billion ($287 billion) federal fiscal budget for 2004 on Thursday. Under the budget, new debts would total €23.8 million and investments would make up €24.8 million, bringing it in line with Germany's constitution, which requires that investments must exceed deficit spending.

The budget would achieve that balance through cuts to benefits for government employees, cuts in subsidies and the elimination of some tax write-offs.

Government payments to the pension and welfare systems will each be slashed by €2 billion, and the coal industry is slated to lose €550 million in government subsidies. The government is also planning to dramatically reduce Christmas bonuses for current and retired civil servants and will eliminate the so-called "vacation bonus," which provides the equivalent of a 14th month of pay. But the budget cuts will also hit the pockets of non-government workers -- especially those who rely on tax write-offs for commuting, which will also be cut. Another provision in the German budget that provides subsidies for first-time homeowners is also being scrapped.

ECB leader warns Germany

The budget proposal is based on Germany's economy growing by 2 percent in 2004, a level it has been unable to achieve so far in 2003. In 2002, the country exceeded the 3 percent ceiling on deficit spending cemented in the European pact ensuring the stability of the euro. It is expected to do the same this year and again in 2004.

European Central Bank President Wim Duisenberg admonished German leaders on Thursday to stick to their fiscal pledges. He said he was worried that the 2004 budget proposed by the German finance minister earlier in the day would again force Germany to violate the European Union Stability and Growth Pact. The pact stipulates that euro zone members must keep their budget deficits below 3 percent of gross domestic product.

"The direction [Germany] is going concerns me. [It] means debts will increase, although they should decrease. That is what was agreed in the Stability and Growth Pact," Duisenberg told the German public television broadcaster ZDF.

Duisenberg said the most important aim in the current economic situation in Germany was to gain consumers' and investors' trust. And the way to do that was for the government to live up to agreements it had made, like remaining in line with the Stability Pact.

Duisenberg was not alone in his concerns. European Union Commissioner for Economic and Monetary Affairs Pedro Solbes warned Germany on Tuesday not to neglect EU budgetary guidelines in the current debate over tax reform. He said Germany could not count on support from the EU if the German government decided to cut taxes and thus failed to stay within the Stability Pact.

A stagnating economy

Germany's economy has been stagnating since 2001. Unemployment reached 4.45 million in May and consumer confidence remains low.

The government is expected to call for a pushing forward of tax cuts planned for 2005 to next year, but it will have to reduce spending in other areas to offset a loss of €18 billion in revenues and stay within the euro zone budget deficit limit. Ministers and coalition party leaders will be discussing the plans at a retreat scheduled to take place this weekend.

But opposition leaders have already attacked Eichel's budget plans. His growth assumptions were unrealistic, according to the deputy head of the Christian Democratic Union (CDU), Friedrich Merz. Hesse's Premier Roland Koch, also CDU, told the newspaper Die Welt his party would prevent homeowner's allowances from being cut when the proposal reached the Bundestag, Germany's upper legislative chamber.

Nor is Koch's threat empty -- the budget can only be implemented if the opposition-controlled Bundestag approves it.

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