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German Tax Collections Fall: Fiscal Disaster Looms

by Ulrika Lomas,, Brussels

27 December 2002

The German government is evidently in denial over its fiscal situation: after the tax commission predicted just a month ago that annual tax collections would be 1.2% below last year's, the government has now announced that revenues were down 2.3% from January to November.

This is disastrous news for the government, already in danger of breaching the Stability Pact 3% of GDP deficit limit. Gehardt Schroder's coalition has been forcing through a highly unpopular €13.5bn ($13.9bn) supplementary budget, and is faced with a threatened general strike over pay by public sector workers.

A finance ministry spokeswoman said bravely that tax inflows in December tended to be very strong, so that no conclusions ought to be drawn yet regarding the full year's out-turn.

The government, recently re-elected on a promise that there would be no tax increases, is under attack from all sides for its miscalculation, and, some say, deliberate obfuscation of the true economic situation during the election campaign. What the Government needs to do is to control soaring costs, but it apparently lacks the spine for it. Like all socialist administrations in difficult times, it just reaches for its tax collectors instead.

In its recent Economic Survey of Germany, the Organisation for Economic Cooperation and Development (OECD) warned that German GDP growth over the coming two years may be weakened if the government continues to rely on tax increases to reduce its budget deficit level. The organisation says that it expects the deficit to amount to 3.7% of GDP this year, and 3.3% next year, but to fall to below the Stability and Growth Pact ceiling by 2004, settling at around 2.6% of GDP.

Although little noticed, the worst news for Germany is probably the flight of assets that is taking place following the announcement that capital gains taxes on the sale of securities and real estate are being extended in order to plug the growing budget deficit.

The country's banks and financial service providers warned in the wake of the announcement that the CGT extension, coupled with a loosening of German banking secrecy would make the country far less competitive in attracting investment. These predictions now appear to be coming to pass.

The German stock exchange, Deutsche Börse has also condemned the CGT plans, arguing that: 'This will obstruct the capital market as an engine for growth and jobs.'

Taken alongside the growing numbers of German businesses looking abroad for cheaper production facilities, a dearth of investible funds in Germany itself may spell something more serious for the country than a temporary recession. If Gerhardt Schroder doesn't do something dramatic to reverse the slide, and soon, it may become irreversible.

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