German Tax Cuts Cannot Proceed Without Subsidy Cuts Warns Eichel

by Ulrika Lomas, Tax-News.com, Brussels

29 September 2003

German Finance Minister, Hans Eichel is bracing himself for a fight over the 2004 budget after telling the upper house last week that accelerated tax cuts will not go ahead unless members accept planned cuts in subsidies.

The German government controversially announced in the summer a decision to bring forward 15.6 billion euros worth of personal income tax cuts by one year, in an attempt to breathe new life into the EU's largest economy, which has slipped into recession after two quarters of negative growth this year.

Plans were already in place to reduce the top rate of income tax next year from 48.5% to 47%, but the new proposal would see the top rate further reduced to 42% in 2004. Nevertheless, the tax cuts come at a certain price, and this will mean cutbacks in subsidies offered to groups such as first-time homebuyers and commuters. Other funding will come from privatisation revenue and new borrowing; Eichel has said that he is allowing for net new borrowing next year of 31.8 billion euros, 7 billion more than previously planned.

However, the opposition-dominated upper house has had a hard time swallowing Eichel's proposals, which resulted in the Finance Minister's warning that the tax cuts cannot take place without the accompanying cutbacks in subsidies. "Not consolidating (the budget) and accelerating the tax reform won't fly," Eichel told lawmakers, according to a Dow Jones report.

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