Germany set to borrow €28bn to fund extra tax cuts

Germany will borrow €28 billion next year, €5 billion more than planned, to pay for tax cuts that the government hopes will stimulate the economy, writes Derek Scally in Berlin.

Chancellor Gerhard Schröder defended the move yesterday, saying it was a legitimate step under euro-zone guidelines and not an attempt to sink the already beleaguered Stability and Growth Pact.

"Everybody only ever refers to it as a stability pact, but the pact, for very good reason, is called the Stability and Growth Pact," said Mr Schröder. "On the basis of the pact, it's possible and necessary to stimulate economic growth."

Mr Schröder hopes that introducing two years' worth of tax cuts at once next year will encourage workers to spend the extra 10 per cent in their pay-packet and not save it, as feared by leading economists.

Berlin hopes the tax cuts will help the German economy out of a three-year slump and help the government achieve its growth target of 2 per cent next year. But Germany's attempt to satisfy euro-zone deficit criteria in the medium term could see it, along with France, continue to breach the terms in the short term.

"More growth is the best way to solid finances. That's why it is also economically indispensable, to allow a one-off higher additional borrowing if at the same time the excess load can be more than evened out through savings," said Mr Eichel, the German finance minister.

The federal government in Berlin will have to pay for €7 billion of the extra €15 billion in additional tax cuts next year, with the rest of the bill footed by the federal states.

Mr Hans Eichel, the finance minister, said the government would raise €2 billion by selling off shareholdings in companies to KfW, a government-owned bank. The remaining €5 billion will have to be borrowed.

The annual interest bill on the new debts is worth an estimated €600 million.

Bundesbank president Mr Ernst Weltecke said yesterday that tax cuts alone would not solve Germany's problems.

"In Germany, we don't have merely an economic problem, but primarily structural problems and a crisis in confidence," he said.