Kohl gives in to tax-cut demands

Helmut Kohl has caved in to his junior coalition partners' demands for tax cuts to boost the sluggish German economy.

In a significant reversal of policy, Chancellor Kohl agreed to a reduction of the "solidarity surcharge" - 7.5 per cent of income tax, which pays for rebuilding east Germany. As the government intends to honour its eastern commitments, the shortfall will have to be made up by the exploding budgets of the national government and the Lander.

This in turn will stifle efforts to keep the federal budget deficit within 3 per cent of GNP, as required by the Maastricht criteria for European monetary union. A government report to be released today is expected to confirm that Germany will fail to meet the EMU targets in 1996 for the second year running.

The "solidarity surcharge" is to be trimmed in the middle of next year, creating a gap of some DM4bn (pounds 1.8bn). The government is also reported to be considering tax cuts amounting to DM34bn. Not all lost revenue will be balanced by less expenditure. Though severe cuts in welfare are scheduled, these will save only DM32bn.

Theo Waigel, the finance minister, proclaimed at the weekend that increasing government debts to pay for the revenue shortfall was "out of the question", but this pledge may turn out to be as durable as the promise to keep the "solidarity surcharge" intact. Faced with soaring unemployment and economic stagnation, Mr Kohl may have to admit that Germany will not be able to escape recession in the confines imposed by Maastricht.

Although the Chancellor refuses to accept that monetary union might have to be postponed beyond 1999, he appears to be increasingly isolated. Der Spiegel reported this weekend that two cabinet ministers and some of his closest advisers were secretly seeking a way out of the "Maastricht trap".

The Free Democrats in Mr Kohl's government have been sniping at the "solidarity surcharge", with their leaders threatening to turn the levy into a resignation issue, at the expense of the Kohl government.

Now the Free Democrats will be able to proclaim a triumph, putting them in a strong position for three crucial Land elections in March. That should ensure the government's survival, but it might be at the price of abandoning monetary union by 1999.