GERMAN: The German government has agreed landmark proposals to reform the welfare state and the tax system in an effort to shake off the country's three-year economic slump.
The proposals agreed at cabinet yesterday will, when implemented, lower taxes from next year, but will also roll back the welfare state and force Germans to make their own pension provisions.
"This is the greatest change in the social history of Germany," said Chancellor Gerhard Schröder of his proposals yesterday, in particular plans to lower dole payments that are generous by European standards to the level of ordinary social welfare payments.
Getting cabinet agreement yesterday was the easiest step: now Mr Schröder faces what promises to be a bitter political battle to get the proposals through the upper house of parliament, the Bundestag, where the opposition conservatives have the majority.
With that in mind, Mr Schröder appealed to the opposition yesterday not to block the reforms with political point-scoring. "Simply saying no, just a blockade-position, helps neither politics nor does it help above all the people who expect solutions from us."
Ms Angela Merkel, the leader of the opposition Christian Democrats (CDU), criticised the proposals, but signalled she was ready to work with the Chancellor on implementing them.
The wide-ranging reforms officially agreed by the cabinet yesterday are a dramatic departure for the government of Mr Schröder. For months now he has been trying to convince the German people that, although it means painful cuts, they should accept the reform devil they know.
"Either we reform ourselves or we will be reformed by unchecked market forces," said Mr Schröder on numerous occasions.
Few can doubt the need for reform in Germany: unemployment is stuck at over 10 per cent; in some eastern states one in five people are without work. Annual economic growth is stuck at less than 1 per cent.
The carrot for German voters to accept the reform proposals is a €15 billion series of tax cuts for next year, largely financed by new borrowing. The cuts will increase average take-home pay by about 10 per cent, money the government hopes will end up in shop tills rather than piggy banks, giving a much-needed boost to the economy.
The stick attached to the carrot, however, is the abolition of a wide-range of government provisions. Financial subventions for commuters, home owners and home builders will be abolished.
Trade tax will be reformed to include freelance independent workers such as journalists, lawyers and doctors, and a greater proportion of the extra tax revenue generated, estimated at around €4.5 billion next year alone, will be passed onto Germany's financially-stretched federal states.
Government data out this morning is expected to show that the German economy, the largest in the eurozone, has technically slipped into recession. Nevertheless Mr Schröder hopes the psychological scales will tip in his favour in the coming months, and growing business and consumer confidence suggests this might be happening.
