Germany may breach pact for third year if tax cuts are made

Germany could breach the stability pact guidelines for the third consecutive year in 2004 if, as expected, finance minister Mr Hans Eichel brings forward tax cuts to stimulate the stalled economy.

Mr Eichel is considering plans to introduce next January around 18 billion in tax cuts originally planned for the next two years.

It's a high-risk strategy to stimulate the German economy that could invoke the wrath of Brussels officials, who are anxious to see Germany balance its budget, as promised, by 2006.

Mr Eichel called a surprise press conference yesterday to say he wouldn't comment on tax cut rumours, only to say he wouldn't rule out fresh tax cuts in his next breath.

He said there was "no simple answer" to Germany's current economic problems, but he admitted that increased tax cuts could be possible if the government successfully implemented its reform programme, Agenda 2010.

The greater the cuts made to state subsidies, "the greater the chances are that we can bring forward tax cuts", said Mr Eichel.

He admitted there was a danger of overshooting EU budgetary limits in 2004 for the third year running if the tax cuts failed to stimulate growth above 2 per cent of gross domestic product (GDP). "We cannot rule out that there will be further stagnation - in the short term," he said.

Last year Berlin breached the euro-zone's Stability and Growth Pact with a budget deficit of 3.6 per cent of GDP and economic growth of just 0.2 per cent.

Mr Eichel has said he would need a "miracle" to bring debt under 3 per cent of GDP this year.

Analysts expect Europe's largest economy to grow by just 0.3 per cent this year. The government's forecast is a more optimistic 0.75 per cent.

Mr Eichel's plans provoked a mixed reaction yesterday. Opposition conservatives, whose support the government will need to push through any reforms, welcomed the move.

Mr Ernst Welteke, president of the Bundesbank, was less enthusiastic, saying his greatest concern was Germany's deficit and not high taxes. "Germany should address its structural problems before considering cuts in tax rates," he said in Berlin.

Chancellor Gerhard Schröder told French television on Thursday that he hoped the European Commission would "interpret the stability pact in a way appropriate to times", in an "intelligent, namely an anti-cyclical way".