German Tax Cuts Delayed By Flooding

by Ulrika Lomas, Tax-News.com, Brussels

21 August 2002

The German government has announced that it will be delaying the implementation of tax cuts planned for January 2003 until the following year, in order to respond to the devastation caused by the recent flooding in eastern Germany.

With the election looming and the government's popularity levels falling, the 6.9 billion euro package was supposed to be the centrepiece of Chancellor, Gerhard Schroeder's economic policy. However, with the budget deficit already perilously close to the ceiling set by the EU's Stability and Growth Pact, the German authorities cannot afford to borrow any more, so something had to give in order to fund the relief effort.

In its monthly report for August, the Bundesbank reiterated the need for caution, arguing that: 'A strict limit on deficits at all state levels is absolutely necessary for the remainder of the year to avoid reaching the 3% level'. The Central Bank also warned that there is now very little possibility that the government will meet the tax revenue objectives which it set itself earlier in the year.

Meanwhile, opinions on Chancellor Schroeder's decision to postpone the tax cuts have been mixed among local observers. Speaking to the BBC on Monday, Adolf Rosenstock, economist at Nomura International professed himself surprised by the government's announcement, explaining that:

'A delay, even by one year, will have a major impact on growth and household consumption as well as corporate financing and investment decisions.'

Ulla Kochwasser from the Mizuho corporate bank was more upbeat, however, telling the news service that: 'This is not good for Mr Scroder's election prospects...but it's good for the government's credibility because it won't have to increase its debt.'

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