17 June 2003

EZA 540 Germany-Economy

German tax reform plans advanced, budget deficit to rise towards 4% of GDP
German Finance Minister Hans Eichel announced on June 13 that he was no longer ruling out additional tax cuts of almost 1% of GDP by combining the second and third stages of the tax reform — despite this year’s deficit of almost 4% of GDP. This is yet another nail in the coffin of the Stability and Growth Pact (SGP), However, Eichel’s call to make the tax cuts conditional on spending cuts is unlikely to be met in full, thus implying a part-widening of the structural deficit. This should also have long-term effects, as even on the European Commission’s ambitious decree to cut the structural deficit by 0.5%, it would take until 2010 to balance the budget — too long a time scale to make fiscal strategy relevant to markets or politics. Apart from that there will be two election campaigns in between. The move is more about avoiding pro-cyclical fiscal tightening, while there seems no scope for active fiscal expansion like in the US or in the UK. This might change, if growth fails to pick up or if the current strides of the government towards structural reform prove to be ineffective in the coming two years.

SummaryAsset Conclusions: A combination of tax cuts and an end to some subsidies should help stocks, in particular those in the financial sector

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© Graham Bishop