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Last Updated: Monday, 30 June, 2003, 05:28 GMT 06:28 UK
Germany bets on tax cuts
Chancellor Gerhard Schroeder (centre)
Mr Schroeder has been on a weekend retreat
Sweeping reductions in income tax are on the way in Germany after Chancellor Gerhard Schroeder and his cabinet decided to bet on Germans' willingness to spend to save the stagnating economy.

The reductions in income tax are worth about 18bn euros ($20.6bn; 12.3bn), and look likely to come into force next year rather than in 2005, as originally planned.

"We want a signal of revival to go out from this weekend to the people in our country," Mr Schroeder told reporters following a weekend meeting of the German cabinet.

The government promises that the cuts will not breach European Union rules on keeping budget shortfalls in check - despite fears in Brussels to the contrary.

Germany has already overshot the 3% limit on budget deficits agreed in the late 1990s by European governments, as a means of stabilising the euro.

Mr Schroeder insisted that the cuts would be financed by subsidy cuts and the sale of shares in ex-state monopolies.

Previous attempts to boost economic growth by trimming the welfare state have been very unpopular.

Crowd pleaser?

"This government is improving the framework for more growth in Germany," Mr Schroeder said.

"It's the signal that we want to send to consumers and business," he said.

Germany's economy is in its third year of near-zero growth and shrank 0.2% in the first three months of this year.

Earlier this week, the tabloid newspaper Bild ran a headline saying the average German household would be more than 1,000 euros a year better off with the new tax cuts.

The Chancellor said that advancing the tax cuts meant average wage-earners would pay 10% less income tax next year.

"Ten percent less tax means 10% more consumption," he added.

The tax cuts now due to take effect at the start of 2004 would slash the top rate of income tax to 42% form 48.5% and the bottom rate to 15% from 19.9%.

Affordable?

Mr Schroeder's Social Democrat party has slumped in polls following September's election, and the Chancellor is keen to reverse the trend.

But critics say Germany is following a similar policy to US President George W. Bush, running up debts for tax cuts it cannot afford.

Mr Schroeder will need the cooperation of the mainly conservative opposition, which controls the upper house of parliament, to bring the reforms into force.

Conservative leaders have said they are willing to cooperate with Mr Schroeder to boost the economy, but they have cast doubt on how the tax plan can be paid for.

"Of course we want tax relief, but not on credit and not with new tax hikes," said Edmund Stoiber, head of the southern Bavarian government and the loser by a hair's breadth in last year's German federal elections.


SEE ALSO:
German budget '15bn euros short'
25 May 03  |  Business
German businesses predict recovery
25 Jun 03  |  Business
Germany set to defy EU on tax
27 Jun 03  |  Business


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