Germany cuts business tax to aid economy

The German Cabinet yesterday approved a sweeping package of budget cuts, accompanied by radical changes to corporate and energy tax, in an attempt to put the country's finances in order and boost confidence in the euro.

"The federal budget has achieved its target saving of 30 billion deutschmarks. With this, the biggest savings package in the history of the federal republic, the budget can be financed without tax rises," the cabinet statement said.

Companies stand to gain DM8 billion in tax cuts that become effective in 2001, as the basic rate of corporate tax falls to 25 per cent. Taxes on petrol and electricity will rise gradually over the next four years, in keeping with the government's commitment to an environmentally aware tax regime.

Almost half the savings come from changes to unemployment benefits and old age pensions, which will from now be linked to inflation rather than the general level of wage increases. But the government abandoned a controversial plan to oblige all employees to supplement their state pensions with private schemes.

The opposition Christian Democrats accused the government of breaking campaign promises and threatened to start a street campaign against the pension reform. The budget has also been criticised by trade unions, the churches and groups representing the unemployed.

But the Green leader, Ms Gunda Rostel, insisted that the changes proved that the centre-left government had embarked on a thorough project of reform. And the Chancellor, Mr Gerhard Schroder, claimed that the budget represented a bridge between the generations in Germany.

"The young need opportunities and the old need security," he said.

The budget was broadly welcomed by business leaders but Mr Schroder made it clear that he expects industry to create more jobs in return for the tax cuts.

"This is not a one-way street. We expect more investment in training, more investment in research and more jobs," he said.