The new German government’s programme for the next four years will include big tax cuts. These will total €24bn a year (1% of GDP) by 2011 when they take full effect. The unfunded cuts will ease the burden on both businesses and households. Reining in the deficit with spending cuts – 5% of GDP – will have to wait until later in the term. We have gone for growth, said Chancellor Angela Merkel. “I don’t see any chance [of stimulating growth] if all we do is save, save, save.”
What the commentators said
“So much for Teutonic austerity,” said Lex in the FT. This “bold” tax-cutting plan, on top of previously taken measures, gives Germany by far the biggest fiscal package in the eurozone. And it’s a “worthwhile gamble”.
With the recession only just bottoming out and revival “still feeble”, it would have been the wrong time for “excessive austerity”, said the FT. What’s more, a relatively “modest” budget deficit of 4% provides some room for manoeuvre. The hope now is that the stimulus will boost recovery and tax receipts before “harsh decisions have to be taken” on lowering spending.
If this plan is going to work, Germany’s notoriously frugal consumers will finally have to open their wallets rather than just save any extra cash. Germany has hitherto relied on selling high-quality manufactured goods to foreigners.
But with demand from key buyers such as eastern Europe and US consumers down, local consumers will now need to spend, said Ian Campbell on Breakingviews. Still, the success of the car scrappage scheme shows it is possible to persuade them to spend, said Lex. And as for the fiscal consolidation later, Wolfgang Schaeuble has a useful asset for a finance minister, said Elisabeth Niejahr of Die Zeit: “he’s not afraid to say no”.