German Tax Revenues Fall In First Quarter

by Ulrika Lomas, Tax-News.com, Brussels

28 April 2003

The latest estimates of German tax revenues for the first quarter are expected to show a year on year decline of 2.9%, according to a report from German daily newspaper, the Frankfurt Allgemeine Zeitung. These figures are likely to compound the country's economic problems, and will almost certainly guarantee a breach of the European Union's deficit limit of 3% of GDP next year.

Many economists are now speculating that the federal government will attempt to plug the growing budget gap by raising the country's VAT rate, currently set at 16%. It is estimated that a 1% increase in this consumption-based tax will raise between EUR8 million and EUR9 million in revenues for the government's coffers. This move would also benefit the state authorities, since sales tax revenue is split more or less evenly between the federal and state levels. The local governments are said to have accumulated a collective deficit of EUR11 billion in the first two months of 2003 alone.

The European Commission is urging Germany to swiftly reform its social security system and labour markets in order to reduce its heavy borrowing requirements. The Brussels institution has warned the German government not to compromise on reforms in this sphere announced by Chancellor Gerhard Schroeder last month.

Finance Minister Hans Eichel has denied accusations that he intends to raise taxes in order to address the nation's fiscal woes, and has reiterated the government's commitment to go ahead with a planned package of income tax cuts over the next two years.

The poor performance of the eurozone's largest economy appears to be rippling out across the union, and recent OECD figures suggest that low growth in Germany is dragging the rest of the EU down. As a result, the organisation has revised total EU growth estimates down for 2003 to 1% from 2.4%. In contrast, it estimates the US economy will grow 2.5% in 2003.

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