18 October 2002, 09:11  German Coalition Tax, Spending Plans May Hurt Economy

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Berlin, Oct. 17 (Bloomberg) -- German Chancellor Gerhard Schroeder's plans to scrap tax breaks and raise pensions contributions may hurt an economy that is already struggling to grow, investors and executives said.
After winning last month's election by the narrowest margin of any postwar government, Schroeder's Social Democratic Party and Green Party coalition agreed to boost the tax burden on individuals and companies and cut spending, raising 66.7 billion euros ($65.1 billion) in four years.
``It's an agenda of shock and horror for businesses and taxpayers,'' said Wilfried Woyke, executive director of Elek GmbH, a maker of computer boards employing 65 people in Hanover.
Unemployment, which Schroeder has promised to reduce, last month was at 9.8 percent. The German economy grew 0.3 percent in each of the first two quarters, holding back European growth. The DAX benchmark of German stocks shed almost a quarter last month.
Germany is likely to violate European Union budget rules this year. Finance Minister Hans Eichel said yesterday the deficit won't be below 3 percent of gross domestic product, the European Union's limit aimed at protecting the euro. The euro fell after his comments, to 97.55 U.S. cents at 1:06 p.m. Frankfurt time from 98.21 cents late yesterday.
The tax plans and spending cuts will prompt consumers to scale back spending and leave companies with less money to invest, executives and investors said.
`Hard' Winter
``The economy has received another blow,'' said Martin Wansleben, executive director of the DIHK industry association, which represents 3 million companies. ``We have to expect more hard times this winter and can't rule out recessive tendencies.''
European Aeronautic Defense & Space Co., whose Eurocopter division is the world's largest maker of commercial helicopters, expects further job losses in Germany's air industry next year as demand for civil aircraft remained weak.
The government's program includes ``no measures calculated to boost economic growth,'' EADS' chief executive, Rainer Hertrich, told reporters. ``That's a grave omission with the economy so weak.''
Woyke said Elek may put off ``considerable investment'' earmarked for next year because of tax law changes announced by the government.
Equity Culture
The coalition plans to allow companies to offset only half their gains with losses incurred in earlier years to ensure that any business with profits pays tax -- a change from current rules enabling companies to write off all gains against earlier losses.
SAP AG, the world's largest maker of business-management software, today abandoned a full-year revenue forecast for as much as 10 percent growth, citing the ``political and economic environment.''
``It seems the government is committed to doing all it can to drive companies out of the country,'' said Michael Rogowski, head of the BDI industry federation, which represents of 107,000 companies with 7.7 million workers, in a faxed statement.
Under the coalition plans, individuals will have to pay taxes on all gains from selling securities, regardless of how long they have held them. Current rules allow private investors to sell shares tax-free if they keep them more than a year.
``This is a big blow to Germany's share culture,'' said Norbert Walter, chief economist at Deutsche Bank AG.
Company Cars
To keep welfare costs within limits, pension contributions -- shared equally between workers and companies -- will be raised to 19.3 percent of gross wage next year from 19.1 percent.
``Tax increases at this time are the completely wrong signal,'' said Peter Lockhofen, who helps manage 3 billion euros at DG Capital Management GmbH in Frankfurt.
In a step that carmakers say will hurt sales, the coalition agreed to raise taxes for owners of Germany's 2 million company cars. Taxes will be raised to 1.5 percent of a car's catalog price from 1 percent now.
``This will further weaken domestic car sales,'' said Bernd Gottschalk, president of the VDA association of carmakers, in a faxed statement.
The government also plans to raise social levies for high- income earners. People earning up to 5,000 euros a month in the west and 4,170 euros in the east will be forced to pay higher pension contributions.
Under current rules, pension contributions are capped at 4,500 euros in the west and 3,750 euros in the east. The HDE retail association, representing a quarter of Germany's 475,000 retail companies, said the change will cut high-paid workers' net income by 50 euros a month.
Home-Buyers
The government will also cut incentives for home-buyers, a measure the ZDB construction group said will cost as many as 200,000 jobs and reduce the number of new houses built by as many as 50,000 next year.
Schroeder also plans to raise value-added tax on a range of products from flowers to dental plates and footwear.
``I just don't believe putting more taxes on things is going to solve the problem,'' said Carsten Schneider, a product manager in Cologne. ``You're taking more money away from people, and there goes the economy.''

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