Kohl's tax cut 'trick' unites opposition

IMRE KARACS

Bonn

The German government's programme to kick-start the economy met unexpectedly fierce resistance yesterday as opposition parties united in an effort to scupper planned tax cuts.

A heated debate in parliament's lower house marked the end of Helmut Kohl's brief attempt to forge a consensus in the face of soaring unemployment, and put the government on a collision course with opposition parties and the 16 regional Lander.

Though Helmut Kohl's coalition of Christian Democrats and Free Democrats carried the day in the Bundestag, the measures are heading for a rough ride in the upper house, controlled by the Social Democrats.

The proposed 2 per cent cut in the "solidarity surcharge" - a levy on income tax destined for the bottomless pit that is eastern Germany - is at the heart of the controversy.

Earlier this week the government announced that it wanted to save DM4bn (pounds 1.79bn) for the taxpayer, and replace DM3bn of that from regional coffers.

The regions, already resentful at having to send large sums to the east, are threatening to rebel. Gerhard Schroder, the Prime Minister of Lower Saxony and deputy leader of the Social Democrats, is rallying his counterparts from all the Lander to a meeting to co-ordinate resistance to Bonn.

The government's critics argue that the tax cut makes no economic sense. In the words of Joschka Fischer, the Greens' leader, the reduction is an "enormous trick", designed as an "electoral gift" for the enfeebled Free Democrats who furnish Mr Kohl with his slim parliamentary majority.

Threatened with extinction in three regional elections next month, the Free Democrats have run a vigorous campaign against the unpopular "solidarity surcharge", eventually forcing Mr Kohl into a corner over the issue.

The circumstances in which the decision was made exploded the consensus Mr Kohl has been trying to build in recent weeks. The unions, which only a week ago struck a jobs pact with the employers and the government, are now accusing the Chancellor of fraud. And the Social Democrats, who together with the unions meekly accepted the need for pruning back the welfare state, are on the warpath.

There was no longer any sign of bipartisan harmony yesterday as Oskar Lafontaine, the leader of the SPD, laid into Mr Kohl's record, lambasting him for "losing 5 million jobs" during his 13-year reign.

The ill-feeling whipped up by what is seen as a transparent vote-buying exercise has now placed the entire economic programme in peril.

The government's package of measures, pledging to halve unemployment by the year 2000, may come unstuck in the upper chamber, the Bundesrat, which consists of representatives from the regional governments. As the SPD controls a majority of Lander, it also holds sway in the Bundesrat.

The government is also faulted for not coming clean on the figures. The Free Democrats and Mr Kohl's Christian Democrats still do not agree how much of the shortfall will be met by the regions, and whether the Lander will have to increase value-added tax to make up the deficit.

Most importantly, nobody knows whether eastern Germany will continue to receive the subsidies it has been promised. The uncertainty comes as a bitter blow to the devastated eastern economy, where growth is slowing and unemployment rising again.

The "solidarity surcharge", or "Soli" as it is called in the west, covers a large portion of the cost of rebuilding the former GDR.

Much of it goes into bricks and mortar, fuelling a construction boom that is bringing Galeries Lafayette to the unemployed proletariat of east Berlin and a post-modernist government district to the Tiergarten.

If some of the money were to stop coming, the shiny new department stores in the shadow of derelict factories might look even more ridiculous.