TAX NEWS - JUNE 2010

Germany Tax: Germany debates swingeing spending cuts

Berlin - In the space of just a few weeks, Germany has gone from government cash splurging to fiscal austerity, with prestigious projects such as a replica royal palace in Berlin now facing the chopping block.

The dismay has been tangible among Germany's foreign friends, who worry that the impending cuts in government spending will choke off the weak economic recovery in the eurozone and even worsen the plight of Greece, Spain and other overspenders.

But Finance Minister Wolfgang Schaeuble appears determined to stop Germany, the biggest economy in the European Union, from being sucked into the same debt vortex as the Greeks.

Last year, Germany reached for money to head off the recession. It spent 5 billion euros (6 billion dollars) on a cash-for-clunkers scheme that subsidized people buying new cars. Extra funds for new roads are still being spent.

On May 16, the word went out that the spending spree was over. Berlin now wanted all eurozone nations to end deficit spending.

Schaeuble came to office last year determined to end government waste and to start early on meeting a 2016 deadline in the German constitution for deficits to be largely eliminated.

On Sunday, leaders of Chancellor Angela Merkel's government began two days of talks in Berlin about where to cut back. The aim is to trim 10 billion euros off next year's budget.

Unlike Commonwealth-style finance ministers, who can reshape taxation and spending with just one annual budget speech, Schaeuble cannot do it alone. He will have to horse-trade with political parties, interest groups and even the courts to achieve changes.

One target may be Germany's tax privileges, some of which are just as unusual as Greece's pay perks for hairdressers and foresters.

For example, when employers pay higher hourly rates to workers on duty after midnight or on Sundays, the supplementary pay is tax free. Supporters claim this income-tax relief is society's way of thanking hospital nurses.

But a vast numbers of Germans enjoy the perk. Economists at Cologne University, the ZEW think-tank and Copenhagen Economics consultants have calculated that the tax break will cost the treasury 2.1 billion euros this year alone.

Then there is tax relief for culture. Germany's standard sales tax is 19 per cent, but the tax on food is just 7 per cent. Proponents say a higher tax on food would be immoral, as even the poor must eat.

Cultural products such as comic books, works of art, newspapers and tickets to the opera are taxed at the food rate too.

Some contend that intellectual nourishment is just as important as protein and vitamins for a healthy society. But the economists point out that it is costing Germany 1.8 billion euros this year.

Fiscal experts argue that whenever a government grants tax relief to one sector, the lost revenue amounts to a subsidy and should be treated as if it were money spent. Opponents contend that abolishing the tax relief is the same thing as increasing taxes.

Neither side can truly win, since it is all a matter of definition.

There is no such ambiguity when it comes to new buildings, such as the royal palace that parliament has ordered to be built in Berlin.

The city already has many vacant lots - and royal palaces - but this one would be special, filling the empty site of the old East German parliament building in Berlin, where the kaisers once lived.

The cost, however, would be special too: an estimated 550 million euros, equivalent to one quarter of the government budget of Malta.

Germany's second biggest city, Hamburg, is experiencing buyer's remorse about a similarly priced building, its half-finished harbourside philharmonic hall. The mayor, Ole von Beust, has admitted that if he could go back in time, he would not have funded it.

"In the current financial situation, and knowing the actual costs, I don't know if we'd have had the rashness to take the same decision. I very much doubt it," he told guests on the building site.

Legislators in Chancellor Angela Merkel's coalition say it would be easy to shelve the Berlin project, but they prefer to soften the bad news by calling it a "postponement."

Italian architect Francesco Stella is still overseeing fine planning. Building work has not begun.

The mayor of Berlin, Klaus Wowereit, deplored the idea of a delay. The deputy speaker of parliament, Wolfgang Thierse, called it a "disgrace." The agency that wants to house a library and museum in the palace charged that even a postponement would besmirch Germany's reputation abroad.

Opponents of cuts are instead suggesting an increase in taxes, or social-welfare levies, to balance Germany's budget.

But Merkel has responded that it is social-welfare spending that must be crimped.

"It's vital that we re-adjust the balance between investment in the future and social-welfare handouts," she told reporters. "It has to happen by making the structures of social security more efficient."