Time Running Out For Schroeder To Pass Tax Cut

by Ulrika Lomas, Tax-News.com, Brussels

10 December 2003

Germany's parliamentary mediation committee is due to begin its third session today as lawmakers try to find a way to resolve the deadlock preventing 15 billion euros of tax cuts from taking effect on January 1 next year.

According to some media reports, Chancellor Gerhard Schroeder has hinted at a willingness to compromise with the conservative-dominated opposition, which put a stop to the passage of his flagship ‘agenda 2010’ economic reforms some weeks ago.

"We can, of course, talk about shifting the balance between debt, privatization proceeds and cutting subsidies" in financing the tax cut, Schroeder told Der Spiegel recently.

However, the Chancellor would still appear to be fundamentally at odds with the opposition, which wants no more than 25% of the tax cut to be funded by government borrowing. Schroeder told Der Speigel that limiting the amount that can be borrowed "may make political sense, but definitely not economic sense," and went on to argue that reviving the economy is a higher priority than fiscal discipline, given the country’s current economic stagnation.

The main opposition Christian Democrats are also insistent that tax cuts must go hand in hand with deeper labour market and trade union reforms.

"A tax cut will only be economically effective if it is accompanied by fundamental reforms on the labor market," Angela Merkel, the leader of the opposition Christian Democrats informed Der Spiegel, adding that: "It's a decisive connection for us."

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