Germany’s Persistent Budget Deficit Hinders CDU Tax Cut Plans

by Ulrika Lomas, Tax-News.com, Brussels

26 May 2005

German opposition party, the Christian Democratic Union has warned that Germany's persistent budget deficit may derail its plans to introduce tax cuts should it win the next general election, which Chancellor Gerhard Schroeder is seeking to bring forward by one year after the ruling Social Democrats received a bloody nose in a regional election.

The CDU had pledged to cut the top rate of income tax to 39% from 42% and the bottom rate to 12% from 15% whilst also slimming down the income tax system to three brackets. However, the party has been forced into an early review of its economic programme after Chancellor Gerhard Schroeder announced that he would seek an early general election after the SDP lost control of Nord-Rhein Westphalia - a region which has supported the party for the last four decades. The general elections were originally due to take place in 2006.

"The budget situation is far from rosy. All we can promise now is to simplify the tax system," noted CDU budget spokesman Michael Meister, according to Bloomberg.

Germany has breached the eurozone's budget rules, which imposes a 3% of GDP budget deficit limit, every year since 1992, and the Bundesbank has indicated that it it is likely do so again in 2005. Moreover, Germany's debt level, at 63%, has broken the 60% limit set by the EU.

Looking ahead to an election campaign based on personalities rather than issues, Schroeder reportedly plans to call and lose a confidence vote on July 1, allowing him to ask President Horst Koehler to dissolve parliament and call a new election a year early.

However, according to some German lawyers and academics, Schroeder's political gambit could be ruled unconstitutional, and a very real possibility exists that the move may be blocked by the country's constitutional court.

Opinion polls have put the CDU and its sister party, the Christian Social Union (CSU), well ahead of the Social Democrats. A Forsa poll published this week by Stern magazine gave the CDU and CSU a lead of 45% to 28% over Schroeder's party.

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