Germany's CDU Tempers Tax Cutting Ambitions

by Ulrika Lomas, Tax-News.com, Brussels

07 October 2009

In the run up to the September elections in Germany, both the newly elected Union party and the Free Democratic Party (FDP) proudly held aloft magical promises of tax cuts, provoking bitter criticism from rival Social Democrats, who referred to the reckless and irresponsible election pledges as utter “madness”.

Yet now that the dust has settled, both the Christian Democratic Union (CDU) and Bavarian sister party the Christian Social Union (CSU) are faced with a stark reality, and have been forced to concede that there is in fact barely scope to implement tax reductions.

As the realisation of the Union party grows that the margins are indeed too small to reduce the tax burden, so too – rather unsurprisingly – does external criticism and pressure.

Deutsche Bundesbank President Axel Weber has recently voiced his concerns, warning that to reduce taxes at the beginning of the new government’s term in office will merely serve to jeopardise the stability of the budget.

Indeed, according to Weber, the FDP’s assurances that a reduction in income tax will quickly generate much needed additional tax revenue to reduce the budget deficit, are misguided. Any attempt to lower state debt through reductions in income tax rates, will merely lead to prolonged periods of increased budget deficit, Weber added.

Rather than introduce tax cuts at this critical time, Axel Weber is urging the government to curb future spending, in a bid to reduce new debt.

Bankers and finance experts have also urged the government to reduce state support for the economy.

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