Defending its debt-financed tax reduction plans, the German Chancellor Angela Merkel said the government would press ahead with the move to cut income taxes by billions of euros from 2011.
Germany government’s plans to reduce income and corporate tax to the tune of 24 billion Euros annually from 2011 at the expense of the nation’s burgeoning state debts in spite of sharp criticisms of the plans by a government-appointed team of economic experts.
The chancellor said in a newspaper interview published yesterday that the tax cuts were urgently needed to kick start economic growth and to take the country out of its worst recession in its post-war history.
The “five wise men” - advising the German government on financial and economic policy issues - in their annual economic outlook published on Friday criticised the plans to reduce taxes without a solid financial basis as “vague” and “untrustworthy“.
They criticised the government for its failure to recognise the dimension of the challenges facing Europe’s largest economy and warned that the tax reduction plan would drive the country’s state debts to new heights for years to come and would violate the European Union’s limit on member nation’s budgetary deficit.
The state debts, which began growing after the outbreak of the global financial crisis, have reached a staggering 85 billion Euros.
Concrete strategies for consolidating the budget are missing, the experts said.
In their view, the government’s plans to reduce income tax and corporate tax would result in a loss of in income tax and corporate tax revenue amounting to 26 billion Euros annually from 2011.
Decrease in tax receipts on such a scale in the coming years “will be unbearable for the economy and could be covered only by raising indirect taxes or reducing public spending,” they warned.
“Whether the new government would like to admit it or not, a consolidation of the state budget will not be possible without deep cuts in public spending or by increasing indirect taxes,” the experts said.
They described as “unrealistic” the government’s arguments that a major part of the tax revenue losses could be recovered when the economy starts growing.
Chancellor Merkel admitted that the government must consolidate the state budget.
“But if we begin that in the middle of an economic crisis, we would only aggravate the crisis,” she said.