German 'Wise Man' Warns Schroder Over Implications Of Tax Increases

by Ulrika Lomas, Tax-News.com, Brussels

10 January 2003

In an interview with the Bloomberg news service published yesterday, the head of German Chancellor, Gerhard Schroder's 'Five Wise Men' panel of economic advisers, Wolfgang Wiegard warned that the government's recent tax increases may hinder the German economy's growth prospects over the coming year.

The increasingly unpopular government is relying upon strong growth in 2003 in order to reduce its budget deficit to under the 3% of GDP ceiling stipulated by the EU Stability and Growth Pact, following reprimands from the European Commission, which this week described the country's economy as 'highly vulnerable to economic shocks' and 'incapable of generating lasting internal growth'. However, according to Mr Wiegard, the panel of advisers is now questioning their November prediction of 1% growth this year:

'The government's tax measures agreed last month certainly question our estimate,' he told Bloomberg, adding that: 'It's a fairly grim outlook...the first three quarters seem almost lost.' According to reports, the government is also less optimistic than it once was, and is set to reduce its current projection of 1.5% growth in its annual economic report, due to be published at the end of January.

The raft of tax measures imposed over the past few months in an attempt to boost revenue include: increases to fuel and energy taxes, higher pension contributions for companies and employees, VAT hikes on some products to the full 16%, and the reduction of tax breaks for homeowners.

It was to an already unhappy electorate, then, that the Chancellor recently announced his plan to impose new taxes of 7.5% on share sales and 15% on the sale of residential property. This ill-timed move provoked many thousands of German to send Mr Schroder the 'shirt off their backs' in protest, and sparked a satirical song into the bargain.

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