Merkel faces rebellion on tax cut stance

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Angela Merkel could be forced to renounce her pledge to eradicate Germany’s budget deficit by 2011 in the face of a challenge by rebellious MPs calling for immediate tax cuts.

The German chancellor, who returns to Berlin from Latin America next week, is facing a confrontation with rebellious MPs claiming to represent nearly 90 per cent of her Christian Democratic Union’s parliamentary group who published a letter this week demanding tax cuts as early as next year.

“Yes, consolidating public finances is our first priority,” said Michael Fuchs, one of the letter’s two initiators. “But if we have the money, then we should give some back to taxpayers and we should do it next year.”

Ms Merkel has so far rejected tax cuts until the next general election, scheduled for September 2009. Yet while visiting a Volkswagen factory in São Paulo on Thursday, she seemed to soften in her opposition following the release of surprisingly strong first-quarter growth figures for Germany.

“We want to forge ahead with the consolidation. But we will give the people back all we can give them back as soon as possible,” she said.

Thomas Steg, Ms Merkel’s deputy spokesman, on Friday denied a change of course. “Don’t read any promise of a tax cut in this.” He was backed by Ronald Pofalla, CDU secretary general, who said there would be “no tax cut in the life of this parliament”.

Yet additional tax relief for families with children and the reintroduction of a recently scrapped tax subsidy for commuters could not be ruled out for next year, Mr Steg said. This suggests Ms Merkel could be preparing budget-busting concessions.

Josef Schlarmann, head of the Mittelstand Association, an influential small-business club within the CDU, told the FT: “Ms Merkel should be careful not to paint herself into a corner. The last thing we need is an all-out conflict between government and parliament on this.”

This week’s revolt by CDU advocates of tax cuts in parliament was not only an unprecedented act of defiance. It also marked a rare alliance of the CDU’s pro-business and its left-leaning wings.

Ms Merkel is also under pressure from the Christian Social Union, the CDU’s Bavarian sister party, which has launched a draft tax cut plan worth €28bn over the next three years without equivalent cuts in public spending.

Both CSU ministers in her government support the plan and one of them, Michael Glos, who holds the economics portfolio, said this week the goal of fiscal consolidation “should not stand in isolation above other [goals]”.

Few conservative MPs reject the government’s pledge to balance the federal budget in the short term. But many complain about the fact that this effort is being mainly achieved through tax increases instead of spending cuts.

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