A sense of reason appears to have prevailed, as Germany’s newly elected Free Democratic Party (FDP) have categorically ruled out the idea of pressing ahead with their tax cut plans at any cost.
Vehemently rejecting a proposal put forward by their Coalition partner, the Christian Democratic Union (CDU) party, the Liberals are refusing to finance their tax cut plans by increasing the amount of new debt in Germany.
Chancellor Angela Merkel had evoked the possibility of including a special clause in the country’s new debt rule in 2011, which would enable the government to increase the country’s debt in "extraordinary" cases of emergency. Recently inscribed in the country’s basic law, the new fiscal rule, or "debt brake," is specifically designed to keep the level of government debt stable.
According to the FDP’s finance expert Hermann Otto Solms, although both Coalition partners are determined to implement significant tax reductions, the FDP will not, under any circumstance, consider the idea of increasing new debt as a means to do so.
Indeed, members of both parties have voiced their stern opposition to the idea of funding the country’s tax reform on credit. Baden Württemberg’s leader Günther Oettinger (CDU) has urged his party leader and Chancellor Merkel to adopt a more frugal budget, and to refrain from adding to the country’s record level of new debt.
The FDP’s budgetary expert Dr Volker Wissing praised the debt brake rule, emphasizing that the new legislation will serve to rein in and compel the government to consolidate its budget. Anything else would be irresponsible, he added.
As negotiations continue, the working groups will aim to draw up a list of priority areas for possible tax cuts.
While the CDU are eager to implement tax cut and investment plans of between EUR15bn and EUR20bn, the FDP will not commit to a figure, preferring instead to adopt a more cautious approach, and to assess the scope for tax relief on a regular basis, depending on the development of the economy. According to Solms (FDP), the party no longer believes that the introduction of a simplified tax system, containing just three income tax rates, is feasible in the current legislative period.
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