Drastic public spending cuts totalling more than €80bn ($96bn, £66bn) were unveiled by Angela Merkel, German chancellor, on Monday, combined with up to 15,000 job cuts in the public sector, as part of a sweeping austerity package.
New taxes will also be imposed on air travel and the nuclear power industry, and some form of financial transactions tax is planned, in addition to a banking levy already agreed by the German government.
Ms Merkel said Germany would be pushing for an as yet unspecified form of Europe-wide financial transaction tax to ensure the financial sector contributes to the cost of the economic crisis. She admitted, however, that the chances of agreeing such a measure at global level in the G20 were slim.
The four-year savings plan was approved after two days of intense negotiations between the partners in the ruling centre-right coalition. It is intended to curb the country’s soaring budget deficit, set to exceed 5 per cent of gross domestic product this year, and to set an example to other members of the European Union, Ms Merkel said.
She described the package as a “unique effort” to reinforce budget discipline and meet the demand written into the German constitution to keep a balanced budget. The “debt guillotine” requires a maximum structural deficit of just 0.35 per cent of GDP by 2016, or little more than one-tenth of the present level set by the EU stability and growth pact.
Looking exhausted after the long hours of talks, the chancellor admitted that other EU members, and the US administration, have urged Germany to spend more to maintain the current economic recovery, and reduce its export surplus. But she insisted that an exit plan from the present stimulus was reasonable and necessary from next year.
The plan stops short of any increases in income tax or cuts in pensions, but focuses instead on reduced social security and unemployment benefits, in a deliberate effort to reduce the numbers of long-term unemployed and raise the rate of employment.
There will be more means-testing of benefits for the unemployed, and cuts in child allowances for unemployed parents, as well as cuts in pension contributions for the jobless.
The package was swiftly condemned by the opposition as an assault on the poorest, with its concentration on unemployment benefits.
Sigmar Gabriel, leader of the Social Democrats, called it “pathetic and incomplete”, for sparing the wealthy and taxing the unemployed, families and local municipalities. He described the plan for a bank levy as an accounting trick.
But Guido Westerwelle, the vice-chancellor and leader of the liberal Free Democrats in the government, who fiercely resisted tax rises, said the plan was fair, imposing costs of €5bn on business, €5bn on social spending, and €3bn on public bodies in 2011.
Net spending cuts in the first year will be €11.1bn, followed by €16.1bn in 2012, €25.7bn in 2013, and €32.4bn in 2014, he said.
Ms Merkel said a decision on the abolition of conscription in the armed forces had been postponed, but the Bundeswehr would face radical reforms in order to meet its spending target.
She said Germany would fight for a Europe-wide financial transaction tax by 2012, and suggested that it would bring an extra €2bn a year to the German budget.
The German thinking is to have a tax on all financial transactions, including computer trading and derivatives. The aim would be to include all high-speed transactions, rather than simply levy a tax on turnover. Although it is not expected to reach any agreement at the G20, Germany plans to push for an EU decision. If that is blocked, for example by the UK, Berlin will try for a eurozone transaction tax.
The “ecological tax” on air travel is intended to raise €1bn a year. Nuclear power producers will have to pay an extra tax in exchange for permission to extend the working lives of their plants, levied as a tax on enriched fuel elements. That is intended to provide a further €2.3bn
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