Popular Merkel rules out tax rises to close Germany's budget deficit

Current opinion polls point to Angela Merkel not only remaining Chancellor when Germany votes on 27th September but she should also be free to govern without the left-wing Social Democrats.  Since 2005 she has had to govern in an awkward grand coalition with the SPD.  In that election her party won 35.2% and the SPD won 34.2%.  Merkel's natural coalition partners, the FDP, won 9.8% and the Greens won 8.1%.  The latest opinion polling has the CDU-CSU-FDP bloc with a combined 51% while the SDP-Green bloc has just 34%.  The SPD are reluctant to govern with the far-Left Linke party, led by Oskar Lafontaine and Lothar Bisky.  The Linke party has 8% to 9% of votes in most opinion polls.

Merkel's standing was boosted last week when data suggested Germany was beginning to come out of recession.  She will be taking nothing for granted, however.  She lost a large opinion poll lead in 2005 when an adviser's plan for a flat tax frightened German voters.  In 2001 the CDU/CSU expected to win but the SPD stayed in power after Gerhard Schroeder campaigned vigorously against the Iraq war and for help for many parts of Germany that had been afflicted by severe flooding.

This week's Economist reports that Chancellor Merkel has ruled out tax rises to close Germany's budget deficit.  Although much smaller than Britain's deficit, the German deficit will be 6% next year (up from 4.7% this year and balance last year).

Even more interesting is the proposal of her likely new coalition partners - the economically liberal FDP.  The FDP wants to eliminate all but three of Germany's personal tax rates.  The cost of tax simplification is estimated at €35bn but the FDP is willing to make the supply-side argument that tax simplification will, in part, boost revenues by discouraging the nation's €350bn black economy.

Over the last four years the SDP has blocked the CDU/CSU's modest instincts to liberalise employment law but Merkel is likely to be encouraged to be bolder by the FDP which favours much greater labour market flexibility.  

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