Oct. 15 (Bloomberg) -- German Chancellor Gerhard Schroeder may this week win backing from the lower house of parliament for income-tax reductions worth about $19 billion and welfare cuts aimed at stoking a recovery in Europe's largest economy. Schroeder two weeks ago threatened to resign should the bills, backed by executives including Siemens AG Chief Executive Officer Heinrich von Pierer, fail to win parliament's approval this year. Lawmakers vote Friday on plans to advance income tax cuts by one year to 2004 and lower jobless benefits. ``Schroeder must break the logjam of reforms and these steps are central to cutting costs for companies and workers,'' said Bernd Karstedt, who helps manage about $117 billion at Union Investment AG in Frankfurt. ``This will boost confidence.''
Germany's economy has grown by less than 1 percent in each of the past two years and fell into recession in the first half of 2003. Since Schroeder won his second term a year ago, unemployment has risen by 290,000 to 4.4 million, pushing up welfare costs and contributing to a budget deficit that the government expects to exceed European limits for a second year. The German chancellor, whose popularity has fallen to the lowest since he took office five years ago, says tax cuts will boost consumer spending and business confidence, contributing to economic growth of about 2 percent next year. Business confidence reached the highest in 2 1/2 years in September while manufacturing orders rose for a second month in three in August.
`Live or Die'
``It's the moment of truth for Schroeder,'' said Manfred Funke, a politics professor at the University of Bonn, Germany's former capital. ``Friday's vote will sound the opening shot of Germany's reform process -- it's live or die for him.'' Schroeder has even cut short his attendance at a two-day summit of European Union leaders in Brussels so that he, Finance Minister Hans Eichel and Foreign Minister Joschka Fischer can participate in the vote. He has asked French President Jacques Chirac to represent Germany in Friday's EU meetings, government spokesman Thomas Steinberg said. The tax cuts will affect small and medium-sized companies, as well as employees, from 2004. The draft law to cut jobless benefits includes steps to force the unemployed to use up parts of their savings before qualifying for benefits and trims welfare for the long-term unemployed who reject low-paid jobs. Schroeder's Social Democrats softened the plans this week to win over six dissenting lawmakers in the party. A test vote yesterday showed all 251 SPD lawmakers will approve the measures, which still need the backing of the upper house of parliament.
Labor Costs
Labor restrictions and costs have kept ComRoad GmbH, a maker of computer boards, from adding staff since 2001, Ruediger Neitzel, the company's executive director, said in a telephone interview. ComRoad, which employs 35 workers near Hamburg, would benefit ``considerably'' from an early reduction in income taxes, Neitzel said. To bring down labor costs that rank among the highest in the world, Schroeder is seeking to cut social security contributions, paid by employers and workers, that include health, retirement, unemployment and nursing-care insurance. ``The simple truth is -- we have high costs,'' von Pierer at Siemens told this week's magazine Der Spiegel. The Munich-based company has cut more than 34,000 jobs in the past two years. ``We've talked enough in Germany in the past years -- now, it's time for action.'' Company spokesman Peter Gottal confirmed von Pierer's remarks. Schroeder three weeks ago won parliament's backing for plans to cut health-care spending by 10 billion euros next year and ease rules on dismissals. The health law, which the upper house will ratify Friday, aims to cut health insurance contributions to below 13 percent of gross pay from 14.4 percent in four years.
Resistance
Hourly labor costs -- including wages, insurance and benefits -- totaled 26 euros in West Germany last year, compared with 23 euros in the U.S., 22 euros in Japan and 19 euros in the U.K., the IW economic institute said last month in a survey. Three-quarters of companies consider labor costs the main obstacle to hiring, the Cologne-based IW said. Schroeder still faces resistance to his plans to cut taxes in the opposition-dominated Bundesrat, or upper house of parliament, and may need to change them to win approval. The opposition Christian Democratic Union, led by Angela Merkel, has called for tougher rules on eligibility for unemployment benefits and says it will wait for November tax revenue estimates before deciding whether to back the tax cuts. Wrapping up the biggest week for the government's economy proposals since Schroeder outlined his plans seven months ago, ministers will meet on Sunday to discuss new steps to overhaul the state pension system. ``The government is moving forward -- it really has no other option,'' said Karstedt at Union Investment. ``Schroeder's plans may change in parliamentary mediation, but the starters' gun has been fired. The reform process is irreversible -- both Schroeder and Merkel have grasped that.''//www.bloomberg.com