German Chancellor Angela Merkel’s Social Democratic coalition partner proposed a 40 billion euro (US$56 billion) economic stimulus program as the ruling parties narrowed their differences over steps to combat the recession.
The Social Democratic Party of Germany (SPD) plans include infrastructure investment and tax relief for families, while rejecting calls by the Christian Social Union (CSU), Merkel’s Bavarian allies, for direct income-tax cuts. The Social Democrats, led by Foreign Minister Frank-Walter Steinmeier, were due to present the package yesterday in talks with Merkel on a second stimulus program.
A coalition rift over tax cuts had threatened to undermine efforts to counter what may be the deepest recession since the end of World War II. That risk receded on Sunday night after Merkel’s Christian Democrats, which oppose CSU demands to lower taxes before September elections, forged consensus with their sister party on raising the tax-free allowance and amending income-tax rules.
“We’re satisfied with the compromise,” CSU General Secretary Karl-Theodor von und zu Guttenberg said in an interview after six hours of talks in the chancellery.
Guttenberg said: “It adds up to a noticeable reduction in tax.”
The compromise involves raising the tax-free allowance to 8,000 euros from just over 7,600 euros and amending Germany’s system of tax rates known as “cold progression,” under which net gains from wage rises are often eroded as workers are placed in higher tax classes.
The Social Democrat proposals, outlined in a 19-page paper, were agreed on by the party’s executive yesterday. It comes after domestic and international criticism that the government’s 32 billion euro package passed on Dec. 5 was insufficient to halt the decline.
The Kiel-based IfW institute forecast on Dec. 22 that the economy would shrink 2.7 percent this year, an outlook that equates to the worst recession since the war. The government, which last month reiterated its forecast for this year of 0.2 percent growth, is due to release a revised estimate on Jan. 28.
Faced with the worsening outlook, economists, labor unions and industry lobbies are issuing competing demands for what they want to be included in the stimulus package. The BDI industry lobby and the BDA employers’ lobby on Jan. 2 joined with the DIHK industry and trade chambers and the ZDH skilled trades group in urging Merkel to cut tax and insurance in wages as the economy struggles “in a way that wasn’t foreseen just a few weeks ago.”
The groups represent all of Germany’s 3.6 million companies including Siemens AG and BASF SE.
The SPD plan proposes tax relief for families and consumers aiming to buy new cars, while reducing health insurance payments for all Germans including pensioners. The plan, entitled “Working Together: Making Germany More Modern and More Human,” envisages part-funding the steps by raising taxes for the better off.
“We can’t just present the rich with a tax gift,” Franz Muentefering, SPD chairman, said on ARD television yesterday when asked about the possibility of tax cuts.
Under the SPD proposal, the top rate of income tax would be increased to 47.5 percent from 45 percent for anyone earning more than 125,000 euros a year. The money yielded from the increase, lasting two years, would be spent on kindergartens and schools.