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The International Monetary Fund has warned the German government that any tax cuts next year must be balanced against compensating budgetary measures.
In its annual assessment of the German economy, the IMF noted that while tax cuts, the 'cash-for-clunkers' scheme and employment subsidies boosted demand in 2009, they also had the effect of opening up a 3.25% of gross domestic product budget deficit from a broadly balanced budget the year before.
Germany's coalition government is currently debating further tax cuts to boost the economy, including a possible “Innovations package”, containing a number of tax initiatives designed to benefit businesses. However, the IMF cautions that any tax cuts under consideration should be carried out "responsibly."
"Our basic message is two-fold," explained IMF Mission Chief to Germany, Juha Kahkonen. "One, in principle, if there is fiscal room, there would be advantages to tax cuts that would be tailored to boosting growth, however, tax cuts—any tax cuts—would need to be done in a fiscally responsible manner."
"And given the need to start fiscal consideration—likely next year, if the current projections hold—there’s a bit of tension and because of this tension, our advice would be that if any tax cuts are undertaken next year, there would need to be offsetting measures of the medium term to allow the government to stay on the consolidation path," Kahkonen added.
The IMF did, however, welcome a new fiscal constitutional rule that imposes limits on the government’s structural deficit.
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