German Tax Revenues seen Plunging in 2003 and 2004

Presenting the latest tax estimates from the government’s experts, the ministry said €8.2 billion less will flow into federal and state coffers this year and in 2004 the government will have to make do with €10.9 billion less than had been previously expected. The added burden each year will be split roughly evenly been the federal and state authorities.

The Finance Ministry said in a statement that Germany’s moribund economy was the main culprit for the poor tax receipts. German growth has ground to a halt in recent years and unemployment remains chronically over ten percent of the workforce.

“The development of income tax revenues in 2003 mirrors the labor market situation,” the Finance Ministry said. “Sales tax revenue continues to suffer from weak domestic demand.”

The grim forecasts for tax revenue come only a few weeks after German Finance Minister Eichel admitted the federal government would be forced to borrow a record amount in 2003. On October 23, Eichel said deficit spending would reach an unprecedented €43.4 billion this year – more than double than the expected €18.9 billion – as failing tax revenues and the flagging labor market squeezed the government from both ends.

Eichel pushes tax cuts

Despite the failing revenues, Eichel on Thursday urged the conservative opposition to support the government’s plans to bring forward tax cuts for next year. He said the tax cuts, which are likely to be blocked in the opposition-controlled upper house on Friday, were necessary to help spark German growth.

“We have to get out of this stagnation,” Eichel said. “Germany and Europe need growth.”

Although the conservatives support the idea of lowering taxes in principle, they object to financing them by borrowing as Chancellor Gerhard Schröder’s center-left government has proposed. In light of Germany’s burgeoning budget deficit, the opposition has called for deeper spending cuts instead of adding to the debt.

“The country doesn’t deserve this,” said Christian Democrat finance expert Friedrich Merz. “What you’ve proposed for January 1, 2004 won’t help solve the problems on the labor market at all.”

As it became clear revenues would come in lower than had been previously expected, Eichel admitted last month that Germany would likely not be able to get its budget deficit next year under the three percent of Gross Domestic Product limit spelled out by the euro area’s Stability and Growth Pact. Assuming the deficit stays above the limit in 2004, it will be the third consecutive year that Germany violates the pact.