Plans for Sweeping Cuts: Germany Tries to Plug Gaping Hole in Its Budget

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The liberals have, for the time being, come to terms with the fact that their pet project of tax cuts is off the table for now. But this has made the FDP all the more determined to make cuts in places that are inopportune for the CDU and CSU. Only a few days ago, Chancellor Merkel, speaking at the federal congress of the Confederation of German Trade Unions, pledged that unemployment benefits would not be cut under any circumstances. The FDP, on the other hand, has identified a particularly large potential for cutbacks in the budget of Labor Minister Ursula von der Leyen, such as an €11 billion program that helps unemployed people reintegrate into the workforce.

The liberals also feel that they can do without the CDU's plans to expand benefits for parents who are taking time off work to raise a child. They also oppose a proposed subsidy for parents who choose to stay home with young children instead of sending them to kindergarten, which the CSU has been demanding with an eye to their conservative Bavarian base. "It's dead," says one FDP budget expert.

Wary of Interest Groups

Merkel can also expect resistance to her austerity plan in the Bundesrat. A number of state governors have sharply criticized Merkel's decision to categorically exclude cuts to the education budget. They are also skeptical of any cost-cutting ideas that could trigger objections among powerful interest groups in their own states, such as energy-intensive industries.

It comes as no surprise that leading conservative politicians are now searching for alternatives to economizing measures. "If we cannot satisfy the requirements of the debt ceiling on the expenditures side, it will be necessary to develop new revenue options by raising taxes," says Peter Müller, the CDU governor of the western state of Saarland. Müller is unwilling to reveal which taxes he wants to raise, but he has said that simply eliminating tax loopholes will not be enough. The CDU needs "decisions that are discussed and then jointly implemented," says Müller.

The coalition's financial experts also suspect that budget cuts alone will not be enough to raise the necessary sums in the long term. The rag can't be squeezed dry again every year, they say. For this reason, the experts are not categorically ruling out "revenue improvements" -- in other words, tax increases -- in the years to come.

A Popular Tax

Conveniently enough, the chancellor last week secured -- at least in theory -- access to the kinds of tax revenues which are highly popular with the general public. In a reversal of her previous position, Merkel has now advocated introducing a fee on financial market transactions, provided other countries go along with the idea.

If the plan succeeds, the chancellor will have eliminated at least some of her problems. Experts say that such a tax could generate revenues in the double-digit billions.

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• Part 1: Germany Tries to Plug Gaping Hole in Its Budget
• Part 2: An Ultimatum to the Ministries
• Part 3: Resistance to Parties' Pet Projects