German Chancellor Rules Out Tax Cuts

by Ulrika Lomas, Tax-News.com, Brussels

12 May 2010

Following the decisive election defeat of the black-yellow government in the key German state of North Rhine-Westphalia, and following a subsequent executive meeting of the Christian Democratic Union (CDU) party in Berlin, Germany’s Chancellor Angela Merkel firmly declared that any proposed tax cuts would be put on ice until 2013.

According to Merkel, the Federal government would not be able to implement tax cuts “in the foreseeable future”. Referring to 2011 and 2012, Chancellor Merkel explained that the government could now at best focus on simplifying the country’s tax system, emphasizing that its priority over the course of the next few years will be to consolidate the country’s budget.

A radical rethink has also taken place within the Free Democratic Party (FDP), with party leader Guido Westerwelle acknowledging that the coalition government no longer has the parliamentary majority needed to realize its own goals, such as the much sought after reform of taxation, alluding to the fact that the left-wing opposition has already made clear its intention to use its increased influence to thwart any tax cut plans.

Up until now, the Liberals had staunchly defended their tax cut plans. In a bid to appease its coalition partner, the FDP had significantly slimmed down its ambitious proposals, calling for tax cuts from 2012 of around EUR16bn instead of EUR35bn as previously outlined in its election campaign.

Nevertheless, Germany’s ruling coalition has been at loggerheads for months now over the divisive issue of tax cuts, with Liberals facing increased opposition to their plans from the CDU, given the increasingly urgent need for budgetary consolidation. Crucially, Germany’s Finance Minister Wolfgang Schäuble (CDU) has expressed his clear opposition to the plans, thereby incurring the wrath of the Liberals.

Although it remains as yet unclear as to which parties will emerge from the state election to form a coalition government in North Rhine-Westphalia, it is evident that this has been a bitter blow for both the German Chancellor and for the government.

In the May 9 elections, the CDU obtained 34.6% of the vote, while the FDP won 6.7%. The Social Democrats (SPD) obtained 34.5% of the vote, while the Greens won 12.1% and the Left Party 5.6%.

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