There can be no doubting the importance of yesterday's budget reforms announced by German Chancellor, Mr Gerhard Schroder, and his new finance minister, Mr Hans Eichel. They are intended to stimulate the German economy and provide much-needed new employment - mainly by reducing and redistributing taxation. On the credibility and effectiveness of this programme much hangs for the SDP-Green coalition government. The two parties have had a turbulent and volatile period in office since coming to power last autumn. This package bears the clear imprint of Mr Schroder's readiness to respond to business concerns while taking due account of popular dissatisfaction about welfare cuts.
Overall, it is intended to cut some 30 billion deutschmarks from the annual federal budget. Pensions and welfare payments will be hitched to inflation, not wage rises, but family taxes are reduced and children's allowances increased. Corporate taxation is substantially reduced, there is a new ecology tax and finance for prestige projects will be frozen. In policy terms these changes are presented as part of Mr Schroder's commitment to a new centrist social democracy which he championed along with the British prime minister, Mr Blair, before the recent European elections - in which both parties did very badly. It remains to be seen whether this mix of measures will improve public perceptions of the coalition, which has suffered from a reputation for internal rivalry, divisions and sheer incompetence. Unless it can demonstrate that they make a difference to the economy and employment in the short to medium term, the coalition will be in even more trouble.
A meeting of the "Alliance for Jobs" set up with the employers, trade unions and the government early next month, will begin to gauge its success. Debate within the coalition and between it and its Christian Democrat opponents, hinges on how much the sluggish German growth rates have to do with inflexible labour markets, heavy welfare commitments and relatively high taxation - all of which need to be tackled before it will recover.
Mr Schroder's government has clearly tilted towards accepting these criticisms. Mr Eichel's measures cut across the policies advocated by his predecessor, Mr Oskar Lafontaine, including macro-economic stimulus and a different balance in taxation. The German economy has recently shown signs of benefiting from the weak euro on export markets and remains high on the list of world industrial productivity. Its sheer scale makes it a determining factor in economic performance of the EU as a whole. The same point applies to the world economy, which has been sustained in an unbalanced and probably unsustainable fashion by the buoyant performance of the US economy so far this year. Many will, therefore, be watching the impact of these measures. Mr Schroder has performed well on the international stage in recent months, chairing two important summits of the European Union, another of the Group of Eight industrialised countries, and an important brokering role in finding a Kosovo settlement. "Now I'll concern myself with domestic issues and I'll do just as well as foreign policy", he says. The next few months will test that resolve.