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Last Updated: Monday, 7 July, 2003, 12:32 GMT 13:32 UK
Germany divided over tax cut plans
Gerhard Schroeder
Things are looking up, says Mr Schroeder
A rift is widening between the German Government and its critics on the vexed issue of tax and budget policy.

Chancellor Gerhard Schroeder, who has staked his reputation on digging Germany out of its current economic stagnation, has delivered an upbeat estimate of its prospects.

He insisted that Germany could afford the stimulus of income-tax cuts without having to raise other taxes, because the economy would grow fast enough to offset lost revenue.

But Hans Reckers, a board member at the Bundesbank, argued that government growth forecasts were "much too optimistic", and that Germany's budget was "catastrophic in the medium term".

Finance Minister Hans Eichel expects the German economy to grow by at least 2% next year, a figure at least twice as high as many unofficial forecasts.

No quick fix

Mr Schroeder insisted that his government was on the verge of a radical economic rethink.

"Taking out of the right pocket to put more in the left pocket isn't going to happen," he told Der Spiegel magazine.

Proposed tax cuts, which come on top of a package of labour-market deregulation, will knock a 15.5bn-euro (10.7bn; $17.8bn) hole in the state budget.

This has sparked criticism, since the German budget was already the subject of considerable concern among European policy makers.

Germany has repeatedly breached EU guidelines on fiscal discipline, which aim to shore up market confidence in the eurozone financial system.

And many German voters are worried that the measures will cost them dear, without necessarily providing sufficient stimulus to chip away at unemployment, currently more than 4 million.

Looking on the bright side

Mr Schroeder's view of the situation is particularly optimistic.

Hans Eichel
Mr Eichel is less sanguine
He said that he could already detect economic recovery - contradicting most economists, who argue that Germany is still on the brink of a full-blown recession.

Mr Eichel has taken a more moderate course, refusing to pin his hopes on a rapid and complete recovery.

While Mr Schroeder has insisted that growth should be enough to help pay for tax cuts, Mr Eichel has warned that a sharp rise in government borrowing is inevitable.

This has brought Mr Eichel into political difficulty, since he has repeatedly stressed his commitment to a balanced budget.

Other German politicians have suggested that the government fund tax cuts by selling off assets such as state gold reserves.

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