Germans give go-ahead for 'solidarity surcharge'

Adrian Bridge
Monday 15 March 1993 00:02 GMT

AFTER months of squabbling, Germany's political leaders cast aside their differences over the weekend to agree on a package of financial measures aimed at boosting economic recovery in the east, while at the same time preventing a deepening of the recession in the west.

The measures, the final component of a 'solidarity pact' proposed by Chancellor Helmut Kohl last September, include higher income taxes for all but the lowest- paid Germans from 1995 onwards and a range of cuts in central and local government spending.

Bjorn Engholm, the leader of the opposition Social Democrats (SPD), said that the agreement reached on Saturday after three days of talks with the government and regional leaders marked 'a great step on the way towards the practical implementation of German unity'.

Theo Waigel, the Finance Minister, said that the country's finances had been put on a 'sound basis for the rest of the decade'. He also expressed confidence that the Bundesbank, Germany's central bank, would view the accord 'positively', prompting speculation of a cut in interest rates.

The original aim of the 'solidarity pact' was to secure broad agreement from all levels of German society over how to share the enormous burden of annual transfers of DM150bn ( pounds 63bn) to the east for the foreseeable future without extending still further the country's aready considerable budget defecit.

While trade unionists agreed to moderate pay demands and business leaders promised to invest more in the east, government and opposition politicians spent months arguing over how and when to levy extra taxes and the extent to which public spending should be cut back.

In the agreement now reached, a 'solidarity surcharge' of 7.5 per cent on income tax will be introduced from January 1995. Unlike a similar surcharge which was levied for 12 months in 1991/1992, the new one will remain in force for 'several years' and, at the SPD's insistence, will include a 'social component' whereby higher earners will contribute more.

Although the SPD had wanted income tax rises to be introduced immediately, the idea was fiercely resisted by Chancellor Kohl, who argued that such a move would exacerbate the country's recession. In return for the concession on income tax, the government agreed to SPD demands not to cut welfare benefits, including unemployment payments, as part of the general package of public spending cuts.

Under the new financial arrangements, almost DM60bn will be raised for the east German Lander (regional states) in 1995. That, coupled with further transfers of central government funds, will be spent on a variety of job- creation programmes, new housing projects, the preservation of core regional industries and environmental clean-up schemes.

With official unemployment in eastern Germany currently at 1.2 million and no real evidence of a self-sustaining economic recovery yet in place, many east Germans feel bitter towards Mr Kohl who, immediately before unification in October 1990, promised that everybody would be better off following the merger of the two states. In the west, the Chancellor's promise that there would be no need to raise new taxes to finance unity is recalled with equal scorn.

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