Merkel hit by backlash at VAT rise

Popular uproar over the German government?s tax rise plans erupted on Thursday as an official forecast showed tax revenue was expected to soar this year as a result of accelerating growth.

The tax estimate, released twice yearly by a circle of government and private sector experts, showed revenues this year would be ?8.1bn ($10bn) higher than forecast six months ago.

Following weeks of warnings by economists, Germany?s popular media on Thursday slammed a proposed three point rise in value added tax, heralding what could become a damaging public debate for the country?s ruling coalition.

?Worst tax rise of all time ? and the finance minister is laughing,? the mass-market Bild Zeitung daily wrote across its front page, referring to the VAT increase and to a package of measures adopted by the cabinet on Wednesday.

Many economists are concerned that the government is finding it easier to raise taxes than cut expenditure and agree on social security and labour market reforms. They fear it could choke off private consumption.

The proposed rise in VAT, they have argued, is not necessary to bring the budget deficit back below 3 per cent of gross domestic product next year.

Thursday?s tax forecast forced Angela Merkel, the German chancellor, to defend her proposed three point rise in VAT, to be introduced in January.

?I know this government is asking a lot from the people in this country with some decisions it has taken in recent days,? the chancellor told parliament, saying Germany had to abide by Europe?s fiscal rules.

?Our credibility in relation to what we expect from other [member states] in Europe is a precious good. That is why this government has pledged to abide by the [EU] stability pact.?

But economists have criticised the government for not taking into account an economic recovery.

?The government?s opinion is that it is paramount to stick to one?s decisions,? Dirk Schumacher, economist at Goldman Sachs, said. ?But the world has changed since this decision was made. Growth is higher and so are tax revenues.?

Such concerns have spread to senior people in Ms Merkel?s administration.

A senior civil servant said: ?This government values predictability. But the public debate over the wisdom of the VAT rise will come. It is already coming.?

There is some unrest, too, about the government?s economic policy within Ms Merkel?s Christian Democratic Union.

For the first time, several of the party?s mighty state premiers criticised the coalition?s focus on fiscal consolidation to the detriment of structural reform at a session of the party?s executive on Monday.

The cabinet agreed on Wednesday to scrap selected tax rebates for individuals and introduce a 3 percentage-point top-up tax for high earners.

These steps should raise tax revenues by ?2.1bn next year and up to ?5.4bn annually from 2010.

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