Kohl pushes for tax reforms to cut deficit for EMU

The German government remained confident yesterday that it could reduce its budget deficit by enough to qualify for the single European currency, despite the prospect that talks on tax reform plans with opposition politicians due today would break down.

The political manoeuvres came as the country's six leading economic institutes urged the government to clarify its tax and spending plans, predicting Germany would just miss the 3 per cent limit without further moves.

"Uncertainty about achieving the Maastricht criteria and doubts about the consistencies of fiscal policies have in fact led to misunderstandings that have considerably burdened the economic climate," the report said.

Theo Waigel, the Finance Minister, reacted by saying: "The government will do everything necessary to reach this target." Decisions would be taken after the latest figures for tax receipts in mid-May, he said.

The economic institutes have cut their forecast for growth this year to 2.25 per cent from 2.5 per cent previously, mainly due to higher-than- expected unemployment. They continue to expect a pick-up later in this year but see little sign of a reduction in joblessness until 1998.

Their forecast for unemployment in 1997, at 4.28 million, is about 80,000 higher than the government's own prediction. This alone accounts for an extra DM2bn (pounds 700m) in public spending. The institutes reckon the government budget deficit will be between 3 and 3.2 per cent of GDP this year, the decisive year for qualifying for the single currency at its launch in 1999. The government's own forecast is of a 2.9 per cent deficit.

Predictions from the European Commission today are expected to share the government's view that it will scrape under the ceiling, but separate forecasts from the International Monetary Fund will be more critical about the lack of progress on deficit reduction in Germany, France and Italy.

Chancellor Kohl plans to introduce a tax reform this summer, cutting income taxes by DM30bn, but financing this and raising additional revenues through higher taxes on spending. The cabinet approved the plan yesterday, but the opposition SPD could hold up the tax reform in the upper house of the parliament.

Yet other economists shared the government's underlying confidence. "It is technically still possible to meet the 3 per cent target. The question is what policies will be adopted," said Holger Fahrinkrug, at investment bank UBS in Frankfurt.

Chris Golden at Nomura in London said the government had enough scope to meet the target, but doing so by raising taxes would be problematic. "It would be ridiculous to rule out EMU on the basis of being 0.2 per cent outside the target."