Central bank sees little room for tax cuts

Central bank sees little room for tax cuts
Photo: DPA
Axel Weber, the president of Germany’s central bank, said on Saturday that deteriorating public finances means there is little room for tax cuts, which have been made a priority by the country's incoming centre-right coalition.

At a meeting of the International Monetary Fund in Istanbul, Weber said that the government needs to figure out how much money it will have and come up with a list of priorities and decide what programs can be cut.

“There is very little play room to reduce the total [tax] burden on citizens if expenditures are not cut,” Weber told reporters.

The Free Democratic Party, led by Guido Westerwelle, want to drastically overhaul the tax code and replace the current graduated tax rates with three rates of 10, 25 and 35 percent at a likely cost of around €50 billion. Chancellor Angela Merkel’s Christian Democrats have promised a more modest tax cut of €15 billion to stimulate growth, primarily through lowering the bottom income tax rate from 14 to 12 percent.

Bundesbank estimates show that the German economy is recovering from the worst economic crisis in the Federal Republic’s history. But gross domestic product is expected to shrink by approximately five percent in 2009.

And the bank’s data suggest that growth will be anaemic in the long-term, raising the pressure on the new government to cut expenditures and reform public spending. Weber said despite the current recovery, Germany’s economy might not grow more than between one and 1.5 percent annually in the coming years.

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