1 October 2002, 08:55  Germany Will Use Spending Cuts, Not Tax Rises, to Plug Deficit

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By Andreas Cremer
Berlin, Sept. 30 (Bloomberg) -- Germany won't raise taxes to spare the faltering economy further damage and instead lower spending to prevent the budget deficit from exceeding European Union limits, coalition officials said.
Leaders of the Social Democratic Party and Green Party, holding talks on setting up a new government after winning the Sept. 22 national vote, agreed to cut spending, remove tax breaks and review subsidies to offset a budget gap of 25 billion euros ($24.7 billion) in 2002 and 2003, officials said.
``There will be no tax increases in Germany,'' the SPD's parliamentary leader, Franz Muentefering, told reporters. ``That is the clear message'' from the meeting.
Europe's largest economy barely grew in the first two quarters this year while unemployment reached a three-year high of 4.1 million in August. Finance Minister Hans Eichel today cut his forecast for economic growth by a percentage point to 1.5 percent, from 2.5 percent previously.
Germany is struggling to meet an EU deficit limit of 3 percent of gross domestic product designed to protect the euro. The European Commission last week pushed back its deadline for governments to erase their deficits by two years until 2006.
Chancellor Gerhard Schroeder's government, which last week raised its estimate of this year's annual budget shortfall to 2.9 percent of GDP from 2.5 percent, may take advantage of the new budget leeway as the economy slows.
``We won't seek to enforce a delay of the EU's balanced- budget deadline but should conditions warrant it, we will surely make use of it,'' said Muentefering. ``We will move within the European convoy.''
The government predicts economic growth to hold steady at 1.5 percent in 2004, compared with its previous forecast of 2.5 percent, and sees the annual rate of expansion at 2 percent in 2005 and 2006.
Coalition negotiations, attended by Schroeder and Eichel, will resume Tuesday at 10 a.m. Berlin time and are tentatively scheduled to conclude Oct. 15. Schroeder and his cabinet may take their oaths of office on Oct. 22.

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