Massive National Budget Cuts Likely in Germany

Negotiators for the conservative Christian Union parties and the Social Democrats have agreed to cut government expenditure to the tune of 14 billion euros ($16.7 billion) next year and 35 billion euros in 2007 in efforts to consolidate the cash-strapped national budget.

The drastic cuts are needed to meet the European Union's budget deficit criteria by 2007 and to bring German state finances back on a sustainable track, they said.

German public finances are deeper in the red than ever before. Experts believe the government in Berlin alone will have to borrow at least 35 billion euros this year to meet its expenditures, not counting the budget shortfalls of local and regional authorities.

The chief negotiators for the Christian Union parties and the Social Democrats on Monday reaffirmed their determination to drastically reduce the overall German deficit, nearing about 4 percent of gross national product this year. After the talks, which ended late Monday, Chancellor-designate Angela Merkel announced the proposed budget cuts for the coming years.

"A difficult heritage"

"It's a difficult heritage, but we are determined to overcome our financial problems," she said. "We have to take drastic measures to come back to a sustainable path that ensures a decent future for next generations. There is a strong will but this task shouldn't be underestimated."

The enormous sum of 35 billion amounts to more than 10 percent of the German national budget. Merkel said that there would be no taboos when it comes to cutting expenditure but added that precise savings measures would be hammered out in bipartisan deliberations scheduled to last until mid-November.

She also wouldn't rule out that taxes in Germany would have to rise in order to meet the ambitious goal. In their election campaign Merkel's CDU already announced a 2 percent hike in value added tax here to finance a reduction in German non-wage labor costs and to help consolidate the budget.

Not pointing the finger

Analysts now believe that Merkel's plan to reduce business taxes is most likely to be scrapped given the dire state of German public finances. But on Monday, the conservatives held back from laying the blame on outgoing Chancellor Gerhard Schröder and his ruling Social Democrats.

Merkel said the in spite of the bad news the talks were held in a positive atmosphere -- a view shared by SPD party leader Franz Müntefering who is scheduled to become labor minister in Merkel's cabinet.

"The challenge is big, but confidence is not unfounded," Müntefering said. "Both sides showed a willingness to tackle the problems and move Germany foward again."

National debt keeps growing

With German state coffers almost empty, Germans are bound to lose some cherished subsidies such as state money for private home builders and tax breaks for commuters.

But a future grand coalition government would also have to lay the ax to pensions and benefits for Germany's four million unemployed who make up the largest bulk of state expenditure.

The third biggest chunk, with 38 billion euros, is interest on national debt. Any alleviation there, however, can hardly be expected in the near future.