German Business Lauds New Govt Tax Plan, But Debt in Doubt

German business groups Monday lauded the new center-right government plans to stabilize the economy with tax cuts and tame the soaring budget at a later stage.

They are hopeful that planned income tax cuts will boost private consumption and that a planned reform of the business taxation system will help soften the impact of the economic crisis on companies.

But doubts grew over the viability of the new German government's choice to rely mostly on tax cuts to boost the ailing economy, a gamble that will send its immense national debt soaring even higher.

The new center-right coalition parties - including Chancellor Angela Merkel's Christian Democratic Union, the Bavarian Christian Social Union sister party and the pro-business Free Democratic Party - are due to sign the treaty that will guide their next four years in office Monday evening. They reached an agreement on the treaty Saturday.

The plan foresees EUR24 billion (36 billion dollars) in tax cuts, "preferably" beginning in 2011, raising child benefits, reforming the business taxation system and injecting tax money into the struggling social security systems in 2010 and eventually reforming the costly public healthcare system.

"The agreed tax cuts are courageous and will boost growth and consumption," Josef Sanktjohanser, president of the HDE federation of German retailers.

The incoming government's measures come as Germany's economy is expected to contract by around 5% this year, the worst in decades, and to grow by around 1.5% in 2010. Unemployment is set to soar to around 4.1 million next year from 3.5 million on average this year, according to government estimates.

Hans-Peter Keitel, president of the Federation of German Industries, or BDI, said he was disappointed that tax breaks for research and development in the treaty were not included, but greeted it broadly as an "encouraging signal for the German economy."

Keitel said signs that the government would invest in education and attempt to consolidate the budget bode well for the economy's long-term growth.

"The coalition has come out with a strategy of sustainable growth." Keitel said in a statement. "The desire to strengthen Germany as an industrial country is also documented emphatically."

But some economists criticized that the new government failed to come up with a detailed funding plan for the tax cuts and an exit strategy to get rising borrowing and the countrywide deficit, which is expected to widen to at least 5% of gross domestic product next year from around 3% in 2009, under control. German news magazine Der Spiegel even called the new coalition "the debt makers."

They also said it's unrealistic for Merkel to bet on an economic recovery to fully finance the tax cuts. The outgoing grand coalition government has penciled in EUR86.1 billion in new debt in its draft 2010 budget. The new government is set to revise this spending plan in the coming weeks.

In particular, comments by nominated finance minister Wolfgang Schaeuble over the weekend that a balanced budget is not feasible during the next four years was met by criticism.

"This can't be the basis of a solid fiscal policy. A balanced budget can be reached by cutting spending strongly," said Alfred Boss, economists and budget expert of the Kiel-based IfW economic research institute.

Ifo institute's chief economist Kai Carstensen said that the government should have said which spending cuts they are eyeing.

"What is lacking [in the treaty] is a chapter with the headline 'Concrete steps for a budget consolidation after the end of the crisis'," said Carstensen.

The government also came under fire for plans last week to set up a shadow budget of at least EUR50 billion this year and then use that money to fund some social security spending for the coming years. They then abolished the plan for such a budget in 2009 and said the costs would be included in the regular budgets for coming years.

Boss said plans of setting up such a shadow budget "was impertinent."

"It seems they believed they could pull people's leg by hiding debt in a shadow budget," Boss said, adding any tax cuts should be linked to spending cuts. "One can cut taxes strongly if one cuts the spending side strongly. Only a small part of tax cuts is funding itself with higher economic growth and employment."

German bunds futures were little moved by the new coalition's plans, trading at 120.77 by xxxGMT after opening at 120.69.

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