Merkel claims tax cuts will drive recovery

Angela Merkel, the German chancellor, has defended her government’s decision to support growth by cutting tax to the detriment of fiscal consolidation.

Yet she conceded on Tuesday that the enterprise was fraught with risks, saying: “If we make mistakes on the way, there will be no opportunity to correct them. But if we do it right, we will give Germany new strength.”

Addressing parliament for the first time since her re-election 13 days ago, Ms Merkel said her government would go ahead with tax cuts for consumers and business even though the federal budget deficit was on course to hit €90bn ($135bn, £80bn) next year – more than double its postwar record.

She said the tax cuts would ensure that Germany emerged “swiftly” from the economic downturn of the past two years. “Without growth, there can be no investment, no new jobs, no money for education and no assistance for the weak.”

Ms Merkel disclosed that the government would extend the short-time working scheme, which subsidises companies that hold on to redundant workers through the downturn. The 10-month-old scheme has prevented a sharp rise in unemployment.

She urged parliament to expedite discussions on a “growth acceleration bill”, adopted by her cabinet on Monday. The first package of growth-stimulating measures includes tax relief for families with children and for companies.

Frank-Walter Steinmeier, leader of the opposition Social Democratic party in parliament, accused Ms Merkel of betraying Germany’s tradition of fiscal prudence and of complacency in betting on rising tax returns once the crisis is over. “The trick never worked,” Mr Steinmeier said. “You know it does not work and still you are going ahead with it.”

Supporting growth, the chancellor said, was one facet of an ambitious five-point agenda for her government to overcome the economic crisis, strengthen the bond between citizens and the state, manage a shrinking and rapidly ageing population, fight clim­ate change and seek a better balance between security and freedom.

Under domestic pressure after the collapse of a state-sponsored bail-out of the Opel carmaker, owned by General Motors of the US, Ms Merkel defended her support for the deal, saying: “Had we not done this, Opel would no longer exist.”

Berlin had agreed to inject €4.5bn into the company and provided a bridging loan to cover running cost. Yet the deal unravelled when GM reneged on the central condition – the sale of Opel to a Canadian-Russian consortium – in a decision that Ms Merkel called “highly regrettable.”

“We except GM will shortly provide us with a solid and reliable concept” for an Opel restructuring, the chancellor said.

Ms Merkel said she would attend the United Nations climate change summit in Copenhagen next month in order to improve its chances of success.

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