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Business

Massive Budget Hole Hits Government Hard

A panel of fiscal experts on Thursday delivered the bad news everyone expected: Over the next three years, Germany will see tax shortfalls of €61 billion ($72 billion), posing huge problems domestically and for Europe.

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The tax revenue shortfall is €10 billion more than expected

Three years of stagnation was the main culprit behind the massive tax revenue shortfalls, according to the 31-member panel. Though the Federal Statistics Office on Thursday released a preliminary report showing the German economy had grown modestly by 0.4 percent in the first quarter of 2004, the lost tax revenue this year alone will amount to close to €10 billion ($11.8 billion).

"The results … clarify the consequences three years of stagnation has had on all German budgets," German Finance Minister Hans Eichel told reporters after the panel released its results Thursday afternoon.

No tax hikes, no spending cuts

The embattled finance minister, who has been called on to resign by opposition politicians, said the government would not hike taxes or cut more spending as some economists had speculated. Eichel, who has built his reputation on reining in spending, said doing so now would be "poison" for the nascent economic upswing in Germany.

Government officials are also no doubt wary of voter backlash. Germans are already bristling at unpopular welfare and labor market reforms pushed through by the government in recent months. Voters in a number of upcoming state elections are not likely to react well to the prospect of unfilled potholes, less police or fewer school books over the next few years.

"Largest financial disaster" in history

Opposition party officials had statements ready when the bad news hit. Christian Democratic Union Secretary General Laurenz Meyer called on Eichel to freeze the budget and then resign, along with the rest of the government. Representatives of CDU's sister party in the opposition, the Christian Social Union, expressed a similar sentiment.

"The … coalition government is driving Germany into the largest financial disaster in its history," said Michael Glos, head of the CSU parliamentary group.

Commentary from the European Union will likely be just as biting. Thursday's results all but confirmed that Germany would break EU budgetary rules for a fourth year running in 2005. The Stability & Growth Pact promises fines for any government with a deficit of more than 3 percent. Some economists predict a deficit as high as 4 percent for Germany.

Fiscal discipline

Eichel has yet to come up with a comprehensive plan to fill the €40.2 billion in tax hole the federal government will have to deal with in the next three years. For the current year, Eichel said he planned to maintain fiscal discipline but allowed the possibility that he would increase the spending deficit.

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