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schroeder banks on tax cut plan to spur economy

AFP, Berlin
Chancellor Gerhard Schroeder announced Sunday that he would bring forward a multi-billion-euro package of tax cuts by one year in order to stimulate Germany's sickly economy, despite the risk of running foul of tough EU guidelines.
He told a press conference at the end of a weekend cabinet seminar that it was both "an important economic stimulus as well as being socially just."
The measure will mean a loss to the government of tax revenues worth 16 to 18 billion euros (17.520.5 billion dollars) next year.
Finance ministry experts claim the package is worth 1.0 percent in terms of growth, revitalising an economy that Finance Minister Hans Eichel said has now entered a third year of stagnation.
Schroeder said it was "a signal for stability and for growth."
However, the measure still has to go through parliament and the opposition conservative Christian Union, which dominates the upper house, has threatened to oppose any attempt to bring forward the cuts as too economically risky.
Another problem is the danger that it could lead to a bigger public deficit in Europe's biggest economy, a risk Germany can barely afford to take.
The nation is already one of three euro-zone countries facing disciplinary action, including the threat of multi-billion-euro fines, for failing to hold public deficits below 3.0 percent of gross domestic product.
Last year, Germany's deficit shot up to 3.6 percent and it looks likely to exceed the limit again this
year. Some experts suggest it will remain as high as 3.5 percent.
EU Commission President Romano Prodi warned in a newspaper interview Sunday against any steps that could trouble the 1997 euro-zone stability pact.
Eichel insisted that even with the tax relief package, next year's deficit would be "exactly three percent."
Schroeder said the tax relief package was a vital part of a broader effort to boost the flagging economy and slash chronically high unemployment.
He had gathered his ministers at a secluded residence near Berlin to ensure unity behind a belttightening budget unveiled Thursday by Eichel and to chart the course ahead.
The chancellor said that advancing the tax cuts meant average wage-earners would pay 10 percent less income tax next year than they will in 2003.
"Ten percent less tax means 10 percent more consumption," he added.
The package is the third and final phase of a relief programme under which the top rate of tax will be reduced from 48.5 percent currently to 42 percent, and the lowest rate from 19.9 percent to 15 percent.
The first phase came into effect in January 2001. The second is due to take effect in January next year.
The third phase had been scheduled for January 2005 but will now also take effect next January if Schroeder manages to push it through parliament.