The German government announced Tuesday that it will continue with its tax-relief plans despite strong opposition from regional leaders, who say they will have to shoulder almost half the cost.

The plans include 8.5 billion euros in tax relief per year from 2010 for families and businesses, which the government says is crucial for the country's economic recovery.

"In such a unique economic crisis the state must do the little that it can do to boost growth, financed by higher debt," Wolfgang Schaeuble, the German finance minister, told Stern magazine last week.

Increasing national debt

Regional leaders from within German Chancellor Angela Merkel's Christian Democrats (CDU) are worried the tax-cut plans will add more strain to their already stretched budgets.

CDU leaders from Schleswig-Holstein, Thuringia, Saarland, Saxony-Anhalt, Baden-Wuerttemberg and Saxony have all expressed concern. They say they will block the legislation if it comes before the upper house of parliament in its current form.

Merkel has refused to "buy off" the opposing leaders within the party, but coalition sources say the rules over the use of existing economic stimulus packages may be eased.

But it is not only regional leaders who have expressed concern over the tax cuts. Jean-Claude Juncker, chairman of the 16-nation eurozone, said Germany's rising debt is "excessive and scarcely bearable for the next generation." The tax-cut plans have also been criticized by Germany's Bundesbank.

"Unfunded spending increases and tax cuts in 2010 are a problematic signal," the Bundesbank said in its monthly report for November. "They draw out and make more difficult the necessary process of consolidation, and the observance of international obligations and national rules."

Germany's budget deficit, economists believe, will be around three percent of GDP this year and widen to over five percent in 2010. That will put Europe's largest economy in breach of the European Union rules it was at the forefront of creating. According to the EU's Growth and Stability Pact, a member's annual budget cannot exceed three percent of GDP.

Axel Weber, head of the German central bank, said last week that Germany should bring its budget deficit to below three percent by 2012. Finance Minister Schaeuble on Monday said Germany aims to reduce its budget deficits to within the limits allowed by the EU by 2013.

Fiscal reputation in question

Critics say Merkel's plan to pay for the tax cuts with borrowed money – adding more to Germany's 1.5 trillion-euro debt – is throwing the country's reputation for fiscal prudence out the door.

There is also concern that Germany may inspire other European countries, many of which already have even higher deficits, to become careless with their own debt levels.

Yet among German voters, the tax-cut plans are popular. A recent opinion poll put 74 percent in favor of the plan, and 54 percent said more cuts should follow.

The issue of tax cuts has added to the problems facing Merkel, namely last week's resignation of her former labor minister, who stepped down over a cover-up of a German-ordered airstrike that killed Afghan civilians.

mk/AFP/Reuters

Editor: Kyle James