Tax woes darken mood as German cabinet starts policy retreat | Germany| News and in-depth reporting from Berlin and beyond | DW | 17.11.2009
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Tax woes darken mood as German cabinet starts policy retreat

As Germany's newly appointed cabinet started a two-day policy retreat, controversial subjects like tax reform, the country's ailing health-care system, and climate change were high on the loaded agenda.

Merkel and Westerwelle speaking ot one another

Can Angela Merkel and Guido Westerwelle find harmony on a retreat?

Two weeks after the cabinet of the new center-right CDU-FDP government was sworn in, the country's 15 cabinet ministers have begun meeting at the Meseberg Palace, north of Berlin, for a two-day policy retreat.

As the session got underway, Chancellor Angela Merkel addressed reporters, saying that that fighting the damage from the world economic crisis was the cabinet's number one aim.

"Quickly creating a budget, so that we can invest," is a major part of achieving that goal, she said.

Merkel also came out with a statement urging the international community to be ambitious in setting climate-change goals, despite the poor outlook for meaningful talks in Copenhagen next month.

"We will make it very clear that we continue to keep ambitious goals for Copenhagen," Merkel said, kicking off the talks. "We must do everything in our power to see to it that a binding agreement is reached."

Looking for a "connection"

Vice Chancellor Guido Westerwelle said the cabinet members were there to find a "way to connect" with one another, which would ultimately contribute to the new government's success. But if the main goal of the retreat is to give the politicians a concentrated chance to discuss their policy objectives for the next four years, there is still plenty of room for heated debate.

Topics on the agenda were budget planning, climate protection, health policy, and a controversial museum on German World War II expellees. But tax policy was set to dominate Tuesday's agenda.

Tax reform was one of the most controversial topics of the election campaign, and featured prominently in coalition discussions between the ruling Christian Democrats (CDU), led by Merkel, and their coalition partners, Westerwelle's Free Democrats (FDP).

The new government has said it is committed to providing 24 billion euros ($36 billion) in tax relief in early 2010 and 2011, as a means to spur growth - and eventually bring about yet-higher tax revenues.

Tax cuts aimed at spurring growth

Merkel has defended her government's planned tax cuts repeatedly, saying she has not yet found a better idea to spur growth in Germany. Critics, including some EU officials, have warned that without corresponding plans to reduce spending, the country risks being buried under a growing mountain of debt.

Westerwelle reading the coalition agreement

Tax reform was written into the coalition agreement

But on Tuesday, Merkel once more reiterated that she sees no alternative to the government's growth-promotion plans.

"If the global economic conditions don't improve, it will be a very difficult path for us. That's why the government... has opted for growth. I indeed face very critical treatment, as does the whole government, regarding the course that we have chosen," Merkel said.

Germany is facing its worst economic crisis in 60 years; the German government forecasts the German economy will contract by 5% this year and grow just 1.2% in 2010.

In its coalition agreement, the new government promised to simplify Germany's complex tax system, and reform its loss-making health-care system as well. The two-day meeting in Brandenburg is a first step in hammering out the details of those reforms.

"Our coalition agreement definitively states that we want to meet our tax-reduction goals partly by means of a banded tax system," German Economics Minister Rainer Bruederle told Tuesday's Hanover Neue Presse newspaper. FDP plans include tax bands of 10, 25 and 35 percent, instead of the current graduated system.

Reformed tax plan

A banded tax is easier and more comprehensible than the current system, he said.

Bruederle, who is a member of the pro-business FDP party, indicated that he was prepared for some compromise in the Meseberg meetings: "Whether or not we wind up with three bands or five bands, that isn't important," Bruederle said.

He also jumped to the defense of the controversial tax-reduction-as-economic-stimulus plan.

Health Minister Philipp Roessler

Roesler is expected to form a commission

"We do not yet have a self-supporting recovery. That's why we have to increase our tax relief … to give (the economy) another push, to increase domestic consumption, and unleash growth potential," he said. "Only ongoing growth can ultimately increase our tax revenues, and get our budget back in order."

FDP party chief Guido Westerwelle, who is Germany's new foreign minister, also said he would accept compromise when it came to how, exactly, a banded tax was implemented.

"We need a lower, simpler, and fairer tax system," he told German TV station ZDF. It doesn't matter whether the change is called a large or small reform; "what is important is what gets decided in the end."

Doubts from the rank and file

However, some politicians expressed doubts about the plan - even those wearing the colors of the ruling coalition.

Leading CDU politician Peter Altmaier said it was still unclear whether implementing the agreed coalition plan was realistic: "The parliamentary party has the job of making sure that we reach our goals, not only in terms of tax policy, but in terms of environment and education policy," he told Dusseldorf's Rheinische Post newspaper.

Premiers from many of Germany's 16 states also made their voices heard ahead of the meeting, warning about the effects a tax reduction could have on state budgets.

Hamburg's Christian Democrat premier Ole von Beust, speaking to the Hamburger Abendblatt, called for a tax policy that "wouldn't mean further financial collapse for state and local government." In Germany, states are mainly responsible for spending on education and integration measures. Therefore, he said, further tax cuts would not be acceptable.

And the Social Democrat premier of the state of Mecklenburg-Western Pomerania, Erwin Sellering, called on the government to "listen to the warnings from nearly all of the 16 state premiers. We do not have any room for these planned tax cuts," the Sueddeutsche Zeitung reported.

Health care, expellee museum also issues

Aside from budget issues and tax cuts, the two-day talks will look at the thorny question of health-care reform, and boosting the labor market.

Germany's new Health Minister Philipp Roesler is expected to be tasked at the talks with creating a commission on how to alter the health-care system in accordance with the new coalition agreement.

The ongoing sharp debate over who should be on the board of a controversial new World War II museum is expected to be taken up as well.

Editor: Michael Lawton

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