Merkel to cut tax – but not spending

Published on Monday 28 September 2009 22:38

CHANCELLOR Angela Merkel has vowed to have a new centre-right government in place by the time Germany marks 20 years since the fall of the Berlin Wall in six weeks.

She also said tax cuts were possible in 2011, but rejected spending cutbacks that might strangle an incipient economic recovery.

Voters on Sunday ended the conservative Ms Merkel's right-left "grand coalition" and gave her a comfortable centre-right majority – thanks to a strong performance by her new government allies, the business-oriented Free Democrats. She met their leader, Guido Westerwelle, for an hour yesterday.

"Germany is entitled to have a new government quickly," Ms Merkel said, noting that the country was just emerging from a deep recession.

Germany has planned a state ceremony to mark the anniversary of the wall coming down, and Ms Merkel said she would like to "greet (foreign] heads of government on 9 November with a new government".

Sunday's election outcome nudged Europe's biggest economy to the right but, with the cautious, consensus-seeking Ms Merkel still in charge, it appeared unlikely to produce a radical lurch in economic policy.

A key plank of her campaign was a pledge to offer moderate tax relief to middle earners. The Free Democrats want a more radical overhaul of the tax system, cutting both the top and bottom income tax rates considerably.

Mr Westerwelle said yesterday his party would push for a "fair" tax system.

Ms Merkel, meanwhile, said possible tax cuts could be implemented starting in 2011 or 2012, but she gave no details of what they might look like. She argues that cuts would stimulate economic growth and ultimately improve tax revenues.

Her centre-left rivals, the Social Democrats – who were her partners in the outgoing coalition – argued that it was a bad idea to cut taxes at a time when the government had run up substantial debts to combat the economic crisis.

Yet the chancellor made it clear that she did not want to implement painful spending cuts to balance the books. And her job will be made easier by a majority in the upper house of parliament, which the "grand coalition" lacked.

The export-dependent German economy returned to slight growth in the second quarter of this year, but is still expected to shrink by 5 per cent or more for the whole of 2009.

"So long as we are in this trough … the question of savings measures is not right," Ms Merkel told reporters.

"We must do everything so that we do not experience what the Americans did at the end of the 30s – namely saving straight into the small upswing that was becoming apparent after the crisis and so breaking this upswing."

Official projections show that Germany's budget deficit will remain above the European Union-mandated ceiling of 3 per cent of gross domestic product until 2013.

During the campaign, both Ms Merkel's party and the Free Democrats advocated halting a plan to shut down Germany's 17 nuclear power plants by 2021 and leaving some open until more renewable energy becomes available. Ms Merkel declined to detail her plans on that issue yesterday.