11 November 2003

EZA 566 Germany-Economy

CDU/Merz German tax plans may bring Laffer growth-boost
CDU/Merz German tax plans spark fundamental debate; may bring Laffer-boost to growth potential Proposals for a fundamental overhaul of the German tax system proposed last week by the right-wing opposition Christian Democrats (CDU) have the potential to become a real breakthrough towards a lifting growth potential in the economy as demanded by the Bundesbank in its paper 'Ways Out of the Crisis' published in Feb03. They have sparked a profound debate, and could be a breakthrough towards a general overhaul of the extremely complicated German tax system. The new German tax estimate last week showed that the general government deficit will be E87bn or 4.1% of GDP, potentially the highest since the recession year 1993. Yet while the situation at that time brought a sharp recovery in 1994 to cut the deficit to less than 3%, the outcome now is likely to be distinctly different. Even under the moderately optimistic growth assumption of the European Commission – 1.6%/GDP next year, the same as our model forecast – the budget deficit would stay close to 4%. Berlin had changed its fiscal strategy to bring forward tax cuts into 2004 even before the CDU's radical proposals. This is a four-page report.

SummaryAsset Conclusions: lower tax rates should help private consumption and consumer related stocks, while cyclical stocks may benefit from higher growth prospects.

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© Graham Bishop