German coalition parties reach budget accord
After four weeks of talks, Germany’s two largest parties reached a breakthrough on Friday night when they agreed on a government programme that will focus on bringing the country’s budget back in line European Union's fiscal rules by 2007. The deal, which comes nearly two months after September’s inconclusive general election, represents a finely calibrated compromise between the rival Social and Christian Democratic parties, which will rule Germany jointly over the next four years in its first “grand coalition” since the 1960s. The new government aims to cut the budget deficit by €35bn ($40.9bn, £23.5bn) over the next two years, marking a return to fiscal conservatism after years of steadily expanding public debt.
The centrepiece is a 3-percentage point increase in value-added tax to 19 per cent from January 1, 2007. Two-thirds of the estimated €20bn in extra revenues will go towards cutting the deficit, while the rest will fund a cut in the high payroll taxes that make German workers among the most expensive in the world to employ. Angela Merkel, the Christian Democratic Union leader, will seek to tackle record-high unemployment, though this will take second place to fiscal consolidation.
In a concession to the Social Democrats, the CDU endorsed a so-called “tax on the rich”, a 3-point income-tax surcharge for high earners, although small business partnerships that are subject to income as opposed to corporate tax would be exempt. In return, the SPD accepted a relaxation of employees’ legal protection against dismissal. This will make it easier to fire new recruits in the first two years of the their contracts.
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