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Subsidies Privatization Borrowing Finance Tax-Cuts

Early tax cut to be financed by reducing subsidies, privatization, and additional borrowing

The early implementation of phase three of an ongoing tax reform program is to be financed on the basis of a mixture of subsidy reductions, proceeds from the privatization of government assets, and additional government borrowing. As a result of the tax cut being introduced a year ahead of schedule seven billion euros in tax revenues will be missing in the 2004 budget. At the end of June the government decided to move the last phase of the tax reform initiated in 2000 up from 2005 to 2004. The intention is to increase consumer spending and generate impetus for economic growth.

At a news conference held on July 16 Chancellor Gerhard Schröder and Finance Minister Hans Eichel explained how the missing tax revenues are to be made up for. At least two billion euros is to be brought in from the sales of government assets. Company holdings owned by the government are to be "parked" at the "Kreditanstalt für Wiederaufbau" and sold as soon as a favorable opportunity arises. Around five billion euros is to be financed on the basis of additional borrowing. This will bring the level of new borrowing up to around 29 billion euros. The additional interest this will cost is to be covered by subsidy reductions and changes in VAT deduction procedures in the building and farm sectors.

The cabinet is scheduled to approve a supplementary budget bill on August 13. The Chancellor and the Finance Minister noted that the supplementary bill will provide for a comprehensive reduction in subsidies and greatly improve the expenditure situation for the government. By the year 2010 this will result in savings of 50 billion euros for the federal government and 65 billion euros for the state governments. "This makes it clear that the country is making progress and the reform process is moving forward," Schröder said.

Five percent cut in subsidies each year

He went on to say: "Over the next three years we will reduce subsidies by an additional five percent each year for a total of fifteen percent." Subsidies for the coal industry are to be reduced more than originally planned, subsidies for housing construction are to be eliminated altogether, as are tax subsidies for commuters who travel distances of less than twenty kilometers to get to work. Extensive reforms of the social security system will also do their part. Schröder reaffirmed that "Agenda 2010 is being implemented at a rapid pace." He expects to reach an agreement with the opposition next week on reforming the health care system. On August 13 the cabinet is to approve the outlines of a plan to merge the unemployment and social welfare benefit systems.

Schröder made it clear that a united effort will be necessary if these ambitious plans are to be realized. He said his expectation is that the opposition will not limit itself to naysaying but rather engage in construction cooperation. Schröder and Eichel reminded their audience that on completion of the third phase of the tax reform the maximum income tax rate will have been reduced from 53 to 42 percent and the minimum rate from 26 to 15 percent.

Freeing up funds for investments in the future

Schröder noted that the budget, Agenda 2010, and tax reform are all part of a coordinated effort. He said the government is working hard to improve the structural situation in the areas of education, research, and child care. "We need to get away from investments that preserve obsolete structures, we need to invest in the future," Schröder said.

He went on to say that if the predictions for growth that have been expressed by experts are realized then it will be possible to comply with the rules imposed by the European Stability and Growth Pact, i.e. to limit budget deficits to a maximum of three percent. "If all the measures planned in the framework of the federal budget and the Agenda 2010 reform program are implemented we will be able to stay within the Maastricht limits," Finance Minister Eichel said confidently. He noted in this context that tax revenues this year are better than expected.

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