Germany Debates Economic Stimulus Measures But Tax Cuts Off The Menu

by Ulrika Lomas, Tax-News.com, Brussels

22 October 2008

The German government is currently working on plans for an economic stimulus package, although Finance Minister Peer Steinbrueck has asserted that there is absolutely no fiscal room for any more tax cuts.

With the German economy flirting with recession, Chancellor Angela Merkel issued instructions to ministers at a recent cabinet meeting to devise targeted measures that would help boost investment in certain key industries, such as car manufacturing. However, the Chancellor has applied strict parameters to any potential stimulus package, stipulating that they must be affordable and be ready to be rapidly deployed.

"The Chancellor spoke out specifically against a vague, traditional, wide-ranging credit and economic programme financed by new borrowing," Thomas Steg, a spokesman for Angela Merkel, told a news conference, adding that the measures would have to be narrowly targeted and "very precise."

However, some ministers in Merkel's left-right coalition government are pushing for bolder action from the leadership, including Economy Minister Michael Glos, a member of the centre-right Christian Social Union, who argues that tax revenues have recovered sufficiently in recent years for the government to be able to afford a broader package of stimulus measures.

Specifically, Glos wants to see action on a number of fronts, especially in the area of taxation, and he has called for a cut in income tax and proposals for tax deductions of health insurance costs to be brought forward. He also wants the government to endorse new tax breaks for low emission cars and help the manufacturing and small business sector with state-backed loans.

But with the German government having just agreed a EUR480bn (USD650bn) bail-out package for the country's banks, the chances of it doling out more money in the form of tax cuts would, at present, appear slim, a fact confirmed by the fiscally conservative Finance Minister Peer Steinbrueck: "I see no room for tax cuts," he told reporters in Berlin.

Since corporate tax reforms went into place in January 2008, Merkel and Steinbrueck have spent much of the year fending off calls for additional tax cuts, both from within the cabinet and from the wider business community. Earlier in the summer, Merkel insisted that plans for a balanced budget by 2011 were "non-negotiable" and said that tax cuts would only be considered when the budget was brought back into surplus.

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