Schröder forced to scale down tax cuts

The German Chancellor, Gerhard Schröder, has salvaged his government's programme to revive the economy by giving in to opposition demands to substantially scale down proposed tax cuts.

Under a deal brokered during a 10-hour session yesterday, Mr Schröder's ruling Social Democrats and the opposition conservative Christian Democrats agreed to reduce Germany's tax burden by ¤18.3bn (£12.9bn) in 2004.

The figure was below the planned ¤26.8bn tax cut, but Mr Schröder said the compromise was not a defeat for his government. He said: "It is a signal that people have been waiting for. It will stabilise and support economic growth."

But heads of industry and independent economic experts said the deal would do little to ease Germany's 4.2 million unemployment problem. "It will hardly have any effect on the jobless figures," said Dieter Hundt, president of Germany's employers' association.

Klaus Zimmermann, of the German Institute for Economic Research, added: "The compromise is neither a signal for a turnaround in the economy nor does it suggest the government is committed to tax reform in the long term."

However, the deal paved the way for parliament to approve Mr Schröder's Agenda 2010 programme this week. The Chancellor had threatened to resign unless parliament approved his package of reforms for welfare and employment law. He has insisted that his programme is essential if Germany is to revive its economy.

The opposition Christian Democrats, who control Germany's upper house, had threatened to block Mr Schröder's programme. Angela Merkel, the Christian Democrat leader, said yesterday: "We have succeeded in setting important agendas for Germany."

The conservatives had opposed the government's plans for more far-reaching tax cuts, saying they would be financed by unacceptably high levels of borrowing. To help offset tax revenues lost through the cuts, both sides agreed on measures to cut subsidies for home owners and commuters.