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Business

Tax Slump Hits Hard

A severe fall in tax revenues has badly hit traditionally wealthy cities such as Munich and sent local authorities in other places reeling. But Finance Minister Eichel is still sticking to his course of financial reform.

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There just aren't enough euros flowing into government accounts in Germany

A huge slump in tax revenue and an unexpectedly large dip in Germany’s main business index on Thursday made for crushing news for an embattled Chancellor Schröder and his party of Social Democrats (SPD) heading to the polls in September.

Tax revenues for the first six months of the year for the federal government, the states, and local authorities plummeted by 5.2 percent to 189.4 billion euros ($190.3 billion), compared with the same period last year. The drop is expected to leave a 10.2 billion gap in public coffers.

The drop comes against the background of weak economic growth and recent stock market tumbles.

To make things worse, the Ifo business-climate index, regarded as a barometer for the 12-nation eurozone economy, dropped to its lowest level since last February, crashing to 89.9 this month from 91.3 in June.

Eichel hopeful despite bad news

But despite the glum news, Finance Minister Hans Eichel of the SPD put on a brave face, arguing that things would begin looking up in the second half of the year.

He vehemently ruled out tax rises and stressed that it was important to stick to a clear fiscal course. "We’ll have the next phase of tax-reductions by January 1 and 2005 also, one must have a long-term, solid and dependable policy and of course one must learn to deal with such revenue shortfalls. This happens once every couple of years. You have to reckon with ups and downs", he said.

Eichel said there are signs that the German economy will begin to recover soon. In the latest report released by the finance ministry, the federal government experts it to grow between 2.5 and 3 percent in the second half of the year. The ministry is now hoping for an economic upturn through more growth.

Critics not convinced

Eichel, however, has not convinced a clutch of local authorities from across the political spectrum who are clearly feeling the after-effects of slipping tax revenues and a sharp slowdown of economic growth.

The President of the German Association of Cities and Mayor of Frankfurt, Petra Roth of the opposition Christian Democratic Party (CDU) has complained that many German cities are on the verge of financial collapse in the face of falling tax revenues.

Local budgets have been particularly exposed because of their dependence on local trading taxes, closely linked to the health of companies in the area.

Once affluent Munich in financial dire straits

One of the worst-affected cities is Munich in the south. Once known as a magnet for top talent, investment and companies - and as the city that best weathered the recession - Munich is virtually broke today.

Munich-based electronics maker Siemens and chip maker Infineon, the two dominant multinational pillars of the local economy, have recently laid off thousands world-wide.

This week Christian Ude, SPD mayor of Munich, announced a spending freeze on all but legally required services because of collapsing tax revenues.

But finance minister Eichel is adamant that the German federal government is not responsible for Munich’s financial misery.

"After the trade tax degenerated into a mere big industry tax in the past years, we made a row of fundamental changes last year that would in future stabilise the amount of trade tax, starting from this year. What we are seeing in Munich is in large part a consequence of economic developments in the region since 1995".

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