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Monday, 19 August, 2002, 16:50 GMT 17:50 UK
Germany delays tax cuts for flood relief
Mending a restaurant in Passau
Flood damage may cost up to 10bn euros
The German government has postponed promised tax cuts in order to help pay for the damage caused by floods.

The change in fiscal policy will free up 7bn euros ($6.89bn; 4.5bn) to help the relief process, according to the finance ministry.

The tax cuts, originally due to come into force on 1 January 2003, were the centrepiece of Chancellor Gerhard Schroeder's economic policy.

With an election looming next month, Mr Schroeder has been under considerable pressure to match generous promises from his electoral rival, right-winger Edmund Stoiber.

Limited options

Flood damage in Germany has been estimated to have cost as much as 10bn euros.

Mr Schroeder is trailing in the opinion polls, and observers say he is trying to increase his popularity by responding generously to the disaster.

But Germany is unable to borrow more money to finance the clean-up process because of EU rules - the so-called stability pact - that limit the amount eurozone countries can borrow.

Even before these floods, Germany was close to breaching that limit.

Mixed response

The delay to tax cuts gave rise to a mixed reaction amongst economists and analysts.

"A delay, even by one year, will have a major impact on growth and household consumption as well as corporate financing and investment decisions," said Adolf Rosenstock, an economist at Nomura International, saying he was very surprised by the government decision.

"This is not very good for Mr Schroeder's election prospects...but it's good for the government's credibility because it won't have to increase its debt," said Ulla Kochwasser at Mizuho corporate bank.

The finance ministry had previously announced that it was considering a range of tax breaks for flood victims.

And the labour ministry promised to draft in some 5,000 of the country's 4 million unemployed to help in affected areas.

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 ON THIS STORY
Wolfgang Munchau, FT Deutschland
"This is political opportunism at its best or rather at its worst"

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See also:

19 Aug 02 | Business
19 Aug 02 | Business
16 Aug 02 | Business
16 Aug 02 | Europe
15 Aug 02 | Europe
15 Aug 02 | Europe
14 Aug 02 | Europe
13 Aug 02 | Entertainment
10 Aug 02 | Europe
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