German Economists Criticize Coalition's Tax Cut Plans

by Ulrika Lomas, Tax-News.com, Brussels

17 November 2009

In its latest annual report, the German government’s group of leading economic advisors has vehemently criticized both the government’s recently announced tax cut plans, and the “empty” statements contained in the coalition agreement regarding budgetary consolidation.

According to the group of experts, who regularly advise the government on financial and economic issues, given the significant budget deficit, plans to implement tax reductions without a means of financing the proposed initiatives are simply not compatible with a “serious finance policy.”

The report warns that improved economic growth alone, which the government hopes to achieve through the introduction of significant tax cuts, will not serve to consolidate the budget. Consequently, significant savings must be made from 2011, the report continues.

Despite the fact that the coalition agreement highlights the need to consolidate the budget, the five leading economists nevertheless criticized the government’s failure to divulge concrete measures designed to achieve this goal, and to reduce the record debt that has accumulated as a result of the ongoing economic crisis.

Attacking the government over its plans to reduce the tax burden on individuals and on businesses from 2011 by around EUR24bn annually, the report emphasizes that a reduction in tax revenue of this scale is simply not viable over the course of the next few years.

Without hard cuts in public spending and increases in taxes and other contributions, a consolidation of the state budget is not possible, the report concludes. The government must, at the very least, abandon its tax cut plans, it warns.

Responding to the report, Chancellor Angela Merkel’s spokesman Ulrich Wilhelm confirmed the government’s intention to press ahead with the agreed initiatives contained in the agreement, without any amendments, despite advice to the contrary.

Germany’s Finance Minister Wolfgang Schäuble, who has recently – and rather controversially – ruled out a comprehensive reform of the country’s taxation, welcomed the report’s recommendations.

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