Tax rises and recession face German ruling party congress

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THE PROBLEMS of covering the ballooning costs of unification from a rapidly weakening German economy have finally overtaken Chancellor Helmut Kohl, just before his Christian Democratic (CDU) party's congress opens today. The three-day gathering in Dusseldorf was meant to have been a celebration of Europe. Instead, tax rises and recession will exercise the minds of most delegates.

Having fought tooth-and-nail against those in the CDU wanting to make a clean breast of the government's mounting financial problems, the Chancellor was forced last week to capitulate, at last breaking the taboo on raising unification taxes. To the outrage of his coalition partners, the Christian Social Union led by the Finance Minister, Theo Waigel, and the liberal Free Democrats, Mr Kohl will tell delegates today that tax rises will be necessary by 1995 at the latest.

They will help cover the accumulated debts in eastern Germany, totalling more than 400bn marks ( pounds 162.6bn), which will fall upon the Bonn budget in the mid-1990s. The main reason for putting the rises off till then is that Mr Kohl hopes to get past the general election at the end of 1994 before the next tax blow strikes. But the discussion being forced into the open now points up widespread fear in the CDU that the government's budget predictions are unravelling so fast that further sources of revenue will soon need to be found. Mr Kohl is in an excruciating dilemma. There are endless new demands for subsidies from eastern Germany, where the economy is in a terrible state. At the same time, the slowdown of the western German economy is much more serious than expected. Officials expect revenues next year to be DM20bn less than originally planned. The Economics Ministry has sharply downgraded its 1992 growth forecast for western Germany to between 1 and 1.5 per cent. But some independent economic institutes doubt even that will be achieved, with GDP continuing to decrease since the summer.

Only massive cutbacks in public spending, which the government has so far failed to produce, would offer any chance of Mr Kohl getting through to 1995 without further tax increases. Knowing this, in the first sign that he is ready to tell Germans the bad news, the Chancellor will announce today that those who refuse to support radical expenditure cuts now will ultimately be responsible for taxes having to be raised 'very soon'.

At the centre of the government's rescue package for unification is the so- called 'solidarity pact', a key part of which would be an agreement by trade unions to moderate wage claims in 1993. But the unions have already said they could only do this in return for higher taxes on the better-off, to promote investment in the east. How this is to be squared with waiting until 1995 is something Mr Kohl has avoided clarifying.

The CDU approaches its congress in a state of great unease. 'Growth is stagnating; there are threats of mass layoffs and short-time work, unemployment is rising. A tough winter stands before us,' said the party's economic expert, Friedhelm Ost. A further increase in taxes, in addition to the long-planned rise of 1 per cent in VAT due in January, would be 'poison' for the economy, as Mr Waigel put it. But Chancellor Kohl's options are narrowing. In Dusseldorf his speech will be more of a conjurer's performance than the rallying cry he had originally intended.