13 August 2003

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Germany finalises tax and welfare reforms

Chancellor Gerhard Schroeder's government will this week finalise a radical overhaul of Germany's costly social welfare system, part of make-or-break reforms designed to spur the ailing German economy.
Schroeder will be meeting his ministers today to endorse draft legislation that would reform the federal labour office, restructure funding for municipalities, amalgamate unemployment and social welfare benefits and expand a trade tax.
Schroeder has also promised to bring forward planned tax cuts by a year to 2004.
The German government wants to have a leaner, fitter welfare system capable of supporting and stimulating Europe's biggest but currently worst-performing economy.
Like many other European countries, it faces the problem of a top-heavy welfare system eating into its much-needed revenue sources.
However successful it will be remains unclear – some of the other reforms already pushed through are now bogged down, and some still to be approved are fiercely opposed.
Opinion polls also show Germans deeply sceptical that Schroeder will manage to turn the tide against chronic unemployment, arguably the most visible sign of the country's economic malaise. The German Chancellor believes the worst was over for the German economy, with the mood in industry and consumer confidence both improving.
That was why, he said, it was important to bring in the reforms "to support and strengthen this positive development."
Otmar Issing, chief economist for the European Central Bank, called on Berlin to implement "fundamental reforms, especially in its labour market," to tackle high unemployment and low growth.
The number of people looking for work in Germany stood at 4.352 million, or 10.4 per cent of the working population, last month. But an opinion poll for the Spiegel news magazine found an overwhelming 86 per cent of Germans do no think the overall reforms will turn the tide against unemployment, compared to just 10 per cent who think it will.
If the jobless rate does not go down, Schroeder’s centre-left government would have failed. On welfare, the plan is to combine unemployment and social welfare benefits programmes. Long-term jobless would have benefits subjected to means testing, and would receive incentives to take available jobs and face sanctions if they do not.
That has come under fierce criticism particularly in eastern Germany where, with a jobless rate hitting 20 per cent in places, it can be difficult to find anything no matter how keen the worker. The government says it wants to give up to five billion euros (6.8 billion dollars) to the municipalities to ease their financial plight.
At the same time however, it is taking away other forms of revenue – such as via the plan to bring forward tax cuts – which local authorities say will actually leave them short.
Meanwhile the plan to widen a trade tax, currently paid by larger firms, to include self-employed people such as doctors and lawyers as well, is fiercely criticised for once again targeting the middle classes.
As for bringing forward the tax reform, the opposition conservatives claim that financing it by new borrowing merely delays the pain for another day.
Another potential fly in the ointment is Germany's growth. Officially, the government is predicting 0.75% growth in output this year and two percent next year to help balance its vast programme of economic and social reforms, which also includes an overhaul of health and pensions.
But most experts believe that the figures are far too optimistic, and even Finance Minister Hans Eichel has cast doubt on their validity.

Copyright © Newsworks Ltd. Malta.
Editor: Saviour Balzan
The Malta Financial & Business Times, Newsworks Ltd, Vjal ir-Rihan, San Gwann
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