Forecast deals blow to German tax pledge

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The chances of the German government making good on its election pledge to cut taxes next year were dealt another blow when the latest revenue forecast showed 2011 state tax revenues would be lower than last estimated.

Wolfgang Schäuble, finance minister, said he was now forecasting that an unforeseen revenue loss of €1.1bn ($1.4bn) would reinforce a shortfall of €10.6bn already projected when Berlin passed a first round of tax cuts late last year.

Mr Schäuble said the coalition Christian and Free Democrats had to “weigh carefully” what conclusions to draw about tax policy, although he declined to say whether plans for extra cuts of up to €19bn a year were still realistic.

The finance minister and an increasing number of fellow Christian Democrats have grown increasingly sceptical about tax changes, raising tensions with Free Democrats, who last year campaigned on the promise of cuts.

Mr Schäuble said Germany upholding solid public finances was of “existential importance” given effects of financial and economic crises. “Germany is seen as an anchor of stability in the eurozone,” the minister said.

While he did not refer to the Greek debt crisis, his argument chimed with the thinking of other Christian Democrat grandees, who have come to consider tax cuts ever more unlikely as fears about the euro have grown.

Mr Schäuble said Germany would stick to its goal of reducing the deficit of federal, state and municipal governments to below 3 per cent of gross domestic product by 2013 from a deficit of around 5 per cent seen in 2010.

To reach this goal, and fulfil the criteria of the German constitution’s “debt brake”, which kicks in next year, the federal government alone would have to cut spending by €10bn a year over the next few years, Mr Schäuble said.

He said tax intake would climb back only in 2013 to the level of €561bn seen in 2008, before global economic turmoil struck. “This describes the extent and the long-term effects of the financial and economic crisis,” he said.

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