German Coalition Axes Tax Cuts From Economic Agenda

by Ulrika Lomas, Tax-News.com, Brussels

19 October 2005

Germany's main political parties have agreed that tax cuts for companies and individuals will not be possible during the next parliament as ministers concentrate on finding additional revenues to reduce the budget deficit to below the Stability and Growth Pact's 3% ceiling, according to Social Democrat (SPD) leader Franz Muentefering.

Emerging from nearly four hours of negotiations between the SPD and the conservative Christian Democrat Union (CDU), led by Chancellor-designate Angela Merkel, Mr Muentefering declared that: "There won't be any room for tax cuts. There's no room for that."

Mr Muentefering stated that both parties "expressly confirmed" that tax cuts would not be possible for the duration of the next parliament, which runs until 2009.

The SPD and the conservative parties have been forced into a grueling series of negotiations after September's election failed to produce a decisive winner. Chancellor Gerhard Schroeder has since stepped aside, allowing Merkel to take the reins of government in the next parliament. However, the CDU must still share power with the Social Democrats, with the latter retaining control of the key finance ministry, plus the foreign, labour, justice, health, transport, environment and development ministries. The Christian Democrats will have the economy, defence, interior, agriculture, family and education portfolios. Edmund Stoiber, Merkel's colleague, will be economics minister. Each party can choose its own ministers.

During the election campaign, Merkel's CDU had pledged to cut the headline rate of corporate tax to 22% from 25%, reduce the top rate of personal income tax to 39% from 42%, and the lower tax threshold to 12% from 15%. Mrs Merkel had hoped to offset some of the lost revenues through the closure of certain tax loopholes and eliminating some tax breaks for investors, but it would appear that she has conceded defeat regarding the political reality of Germany's mounting budget deficit, which is set to breach European Union rules underpinning the euro currency for the fourth consecutive year.

"The consolidation of the budget is, of course, the premise for all further political measures," Stoiber, head of the Christian Social Union told reporters.

Negotiations between the two sides are expected to continue well into next month, after which the parties plan to approve a coalition on November 14. Merkel is then expected to be voted into office around three days later.

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