In an effort to break an impasse between Germany’s two biggest political parties over reforms, the premiers of two states on Tuesday proposed a plan to cut federal subsidies by €15.8 billion in three years.
Coal is the big loser in the new subsidy cutting proposals.
The plan represents the first major bipartisan effort to push through a major cut in subsidies, which proponents hope will be an effective tool to get Germany's sputtering economic engine purring again.
Roland Koch, the Christian Democratic premier of the state of Hessen, and Peer Steinbrück, the Social Democratic premier of North Rhine-Westphalia, hammered out the plan during six months of cross-party negotiations during which they combed the German financial landscape, leaving no stone unturned in looking for state subsidies of nearly all shapes and sizes.
They identified €127 billion ($148 billion) in annual subsidy payments the state makes -- excluding grants to municipalities, hospitals, childcare and other care centers. Koch and Steinbrück took that block figure and applied at times a chisel, at time a jeweler's hammer to it. After the dust had cleared, the two concluded, German state subsidies could be reduced to about €77.4 billion ($90.1 billion) a year.
The proposal calls for a reduction of €15.8 billion ($18.4 billion) in subsidies next year and an additional €10.5 billion ($12.2 billion) in each subsequent until that goal is reached. Most of the cuts would come from coal subsidies and write-offs that German taxpayers currently enjoy.
"We’ve put forward the largest subvention cutting program in German history," the 115-page report stated.
Roland Koch (left) Peer Steinbrueck (right)
Koch (left) and Steinbrück (right) are hoping the plan will help ease a reforms blockade between the two parties as the government of Chancellor Gerhard Schröder debates a package of reform bills collectively referred to as "Agenda 2010." Reductions in government subsidies are an important part of the structural reform agenda, which the government hopes will create jobs and spur economic growth in a country that has more than 4.5 million jobless and the lowest economic growth of the entire European Union.
Presenting the plan in Berlin on Tuesday, Hessen’s Koch said federal subsidies are often politically motivated and in light of the country’s spiraling budget deficit, radical cuts need to be made. "A reduction in subsidies that nobody notices is impossible," Koch said. Steinbrüch, meanwhile, said the Social Democrats and Christian Democrats needed to overlook their own political priorities in order to push through the necessary cuts.
Coal subsidy cuts and fewer tax write-offs
The lion’s share of cuts in the Koch-Steinbrück plan would come from coal subsidies, where €530 million a year would be axed. The rest would come from cuts to agricultural and forestry subsidies as well as reductions to tax write-offs. They include reductions in a benefit for first-time home buyers, a lower cap on the amount that can be deposited each year in tax-free savings accounts and reduced write-offs for commute-related costs.
At the same time, the plan would steer clear of subsidy programs for education, support programs for small to medium-sized businesses and medical treatment.
Support from other state leaders
Support is already building around the Koch-Steinbrüch proposal among politicians from both parties.
Calling Germany’s tax system "the loopiest in the world," the Social Democrat Premier from Schleswig-Holstein, Heide Simonis, described the proposed subsidy cuts as a "good start."
"This goal is exceptionally good," concurred Christian Wulff, the Christian Democratic premier of Lower Saxony, before adding on German public television that he hoped the plan wouldn’t be foiled by special interest groups.
But the plan also had its critics.
While praising the dual-party effort, Finance Minister Hans Eichel gave the proposal a lukewarm review. He said the government’s door was open for any method "that leads to success" in cutting the country’s massive deficit, but he warned that blanket cuts to tax write-offs weren’t the right method for reducing the budget deficit. Rather than only being reduced, Eichel suggested, unfair tax cuts and subsidies should be eliminated entirely.
The head of the Association of German Taxpayers said the plan wouldn't go far enough to make any real dent. "As our experience in recent years shows, it’s the right method," said Karl Heinz Däke. "But the sum -- €14.8 billion in three years -- isn’t enough to really lead to a reduction of subsidies. It needs to be a greater (reduction) of about 20 percent."
In a separate report released on Tuesday, Däke’s organization accused the government of wasting €30 billion worth of taxpayers money each year – twice the amount Koch and Steinbrück are seeking to cut from subventions and almost as much money as the country will have to pay in deficit spending this year.
Poll: public prepared for cuts
If a poll released this weekend is any indication, the plan could go over well with German voters. The survey found that the majority of Germans support subsidy cuts, although they prefer that the cuts not affect them personally and are accompanied by tax reductions. Sixty percent said profits on stocks should be taxed and 53 percent said coal subsidies should be eliminated.
Popular programs, however, like first-time homeowner aid or commute-related write-offs had fewer supporters and across-the-board cuts, the so-called "lawmower method," met with disapproval from 71 percent of those asked.