GERMAN ECONOMY:GERMANY'S COALITION government has abandoned plans for radical tax cuts, a key policy ambition for Angela Merkel's second administration, a day after severe losses in a key state election.
Dr Merkel said the political setback and the economic situation made it impossible to deliver €16 billion in cuts as demanded by her junior coalition partner, the Free Democrats (FDP). “Tax relief can, in my view, not be implemented in the foreseeable future,” said Dr Merkel. “Consolidating our budget will have priority.”
She described as a “bitter defeat” the losses sustained by her Christian Democrats (CDU) in the weekend poll in North Rhine-Westphalia (NRW). The result robs her of a secure majority needed to push policy through the upper house, the Bundesrat. But, even in defeat, the power-conscious Dr Merkel wasted no time in turning election lemons into lemonade.
The failure of her FDP junior coalition partner to repeat its strong performance of last September’s general election allowed her to wriggle out of post-election promises for tax cuts and a radical overhaul of the tax system.
In light of growing budget deficits, the FDP demands were a source of growing tension with leading CDU officials, who dismissed the plan. Dashing the FDP’s tax-cut ambitions might cut her junior partner down to size and boost her popularity in her own ranks, but at a risk of irritating Germany’s EU partners.
France and other countries have complained of German-led distortion in the euro zone and hoped tax cuts would help persuade frugal German consumers to start spending again.
Beyond the tax-cut issue, the NRW election outcome has undermined the chances of any radical policy reforms in Dr Merkel’s second government.
After a photo-finish left the CDU just 6,000 votes ahead of the opposition Social Democrats (SPD) in NRW, expectations were growing for a possible grand coalition like Dr Merkel’s first administration in Berlin. That would give the German leader room for negotiation in the Bundesrat.
The other likely option – an SPD-Green government – is just one vote short of a majority in the NRW state parliament and would need support from the Left Party.
“We are prepared to offer our support if the state parliament stops paring back in social welfare,” said Left Party leader Oskar Lafontaine. But with many cities in NRW on the verge of bankruptcy, further drastic cuts are inevitable – regardless of what government takes power in Germany’s most populous federal state.
