The World from Berlin Tax-Cut Success for Merkel, the 'Fiscal Policy Gambler'

Germany's upper legislative chamber passed a controversial tax cut package on Friday, meant to speed up the country's slow economic recovery. But commentators are -- like the country -- still divided on its merits.

Germany's upper legislative chamber, the Bundesrat, approved a controversial stimulus plan on Friday.

Germany's upper legislative chamber, the Bundesrat, approved a controversial stimulus plan on Friday.

German Chancellor Angela Merkel can breathe a large sigh of relief. On Friday morning, members of the Bundesrat, Germany's upper legislative chamber, approved a package of tax cuts put together by Chancellor Angela Merkel's government, a coalition of her conservatives and the business-friendly Free Democrats (FDP).

The approval comes after weeks of wrangling over the bill, with many of Merkel's Christian Democrat (CDU) party allies threatening to torpedo the law. Some state governors were concerned that the tax cuts contained in the bill -- called the "economic growth acceleration law" -- would result in state budget shortfalls. It's passage is a welcome change from recent weeks of cabinet bickering over the bill and a host of other issues following Merkel's re-election in late September.

Beginning in January, the law will usher in annual tax savings for citizens and businesses of roughly €8.5 billion ($12.2 billion). It will also introduce a higher childcare allowance, a more generous tax credit for those with dependent children, relief for businesses and VAT reductions for hotels.

The measure comes at a time when Germany is expected to face the highest level of new debt in its postwar history, and it has been highly unpopular with some in Merkel's party and with many financial analysts. According to a survey conducted in late October by the Forsa opinion research firm, it is also unpopular with the public -- only 26 percent of CDU supporters backed the bill according to the survey and 69 percent of citizens opposed it.

The fate of the bill was still uncertain until a Thursday evening meeting of state leaders. Among the main opponents were the CDU governors of the states of Schleswig-Holstein and Saxony. To help win reluctant state leaders over, Merkel sweetened the deal by promising additional federal funding for education.

'Hard Work' Ahead

The next battle to be fought promises to be equally rancorous. Merkel's coalition would like to introduce additional tax cuts for 2011 and thereafter, but opposition is widespread. The tax cut plan has been opposed by leading economic advisors including the German Central Bank, the Federal Audit Office and the German Council of Economic Experts. On Thursday night, Roland Koch, the CDU governor of Hesse, promised that the debate on further tax cuts would be "difficult and vigorous" and that it would be "hard work."

In Friday's newspapers, published before the vote was held, German commentators weighed in on the coalition's fiscal goals.

The center-left Süddeutsche Zeitung writes:

"Merkel's critics accuse her of being a fiscal policy gambler and mock her for being a compliant playtoy in the hands of her junior coalition partner, the FDP. Given the record level of debt it is assuming, they say that the coalition should save -- in the best case for social expenditures, but certainly not for lower middle-class taxes. Experts such as those with the German Council of Economic Experts and the president of Germany's central bank are being held up as chief critics, but their concerns have only been partially quoted. Often left out is the part where they argue that tax cuts can indeed be useful when they come at the right time, as part of a clear plan for growth complete with cuts elsewhere in the budget."

"It remains to be seen whether the coalition has what it takes to meet such conditions. Initial sins, such as the outrageous special regulations for hotels, lead one to fear the worst. But the verdict is still out and it's too early for analysis: The economic situation is so instable that savings are inadvisable for the moment. On the contrary, the tax cuts planned for 2011 should be moved forward a year because the economy needs an shot in the arm now."

"Those who think that debt can be paid down through savings don't understand how the economy works. Only increased growth can do it."

The business daily Handelsblatt writes:

"It is urgently necessary for Merkel and Vice Chancellor Guido Westerwelle to honestly realize that they are dependent on Germany's states and that they finally turn their attention to just how indebted the federal government is. They then need to take a hard look at the coalition agreement they cobbled together at break-neck speed. They should not lead either themselves, the states or the taxpayers to believe that there will be tax cuts in 2011. In the end, it will of course be the taxpayers who have to pay these debts off. And the states have already made it abundantly clear that they can't bear any more revenue cuts resulting from tax cuts."

The center-right Frankfurter Allgemeine Zeitung writes:

"Recompense for the states has already been agreed upon: The federal government will soon free the states of obligations to pay billions in educational expenses. But it's not just the states that are going to suffer from the shortfalls brought about by the new subsidies, whose effect on growth is doubtful but whose fiscal effect is predictable. Municipalities are also going to have to deal with a drop in business tax revenues of more than €850 million. A number of state treasurers will sleep less soundly."

-- Josh Ward


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