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Running Out of Options

Business leaders say the finance minister’s package of tax hikes and subsidy cuts could misfire. But the chancellor says there will be no more borrowing.


The German economy hasn't been bullish for a long time

Finance minister Hans Eichel’s austerity package to plug looming gaps in the German government’s finances has come in for more criticism.

Representatives from the business sector warned the German Parliament’s finance committee on Wednesday that the measures could have a negative effect on both economic growth and the labor market.

The mixture of tax hikes and subsidy cuts has already been rejected by the Bundesrat, the second house of Germany’s parliament where the conservative opposition has a majority. It’s due to become law on 21 February, and Eichel say it has to be passed in its entirety if Germany is to stay under the 3 percent budget deficit limit in 2003.

The Federation of German Industry says no one disputes the necessity of getting government finances back on track, but its taxation specialist Hans-Jürgen Müller-Seils believes the term “austerity package” is a misnomer. “There’s not one word about saving,” he says. “The relationship between name and content is analogous to a can of dog food labeled caviar.” The Green politician Christine Scheel, who is chairing the parliamentary committee, says she expects a lot of changes will have to be made.

Spending your way out of trouble is not an option

The finance minister could at least take comfort from Tuesday’s announcement that public borrowing in 2002 was 2.8 billion euros less than expected. But the news came on the same day that chancellor Schröder publicly ruled out any increase in public borrowing to stimulate the economy, which somewhat limits Eichel’s room for maneuver.

Economics and labor minister Wolfgang Clement recently said borrowing was an option, but Schröder told journalists during his annual new year press conference, “The debate on indebtedness has no basis in reality.” Any shortfall in revenues or rise in spending, he said, could be overcome. “There is no reason to alter the 2003 budget.”

Clement now says he believes this year’s deficit will be under the three percent limit even if growth fall as low as the one percent predicted by independent economists. (The government forecast is one point five percent.)

“We would be below the three percent,” he said. “Only just, but nevertheless.”

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