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. Last Updated: 07/27/2016

Bundesbank Attacks Government Policies

BERLIN -- Germany has announced plans to plug a gaping hole in the budget and introduce a new capital gains tax but the Bundesbank has rounded on government policies it says will harm the fragile recovery of Europe's largest economy.

Finance Minister Hans Eichel said Monday the government would have to borrow more than planned this year and next as slumping tax revenues and higher spending, particularly on unemployment benefit, have wrecked budget forecasts.

Eichel announced spending cuts of 1.3 billion euros ($1.3 billion) as well as tax increases, including a new capital gains tax of 15 percent on share sales and on investment property, that he said were needed to get the budget deficit back under three percent of GDP next year.

"I never intended to stray from the line of sinking deficits during my time in office. But the economic climate forces me to do so. Despite that I remain committed to budget consolidation," Eichel said in a statement.

In its latest monthly report, the Bundesbank highlighted the frailty of the German recovery and criticized government policies for threatening long-term growth.

"It should be investigated whether there shouldn't be a stronger use of measures that predominantly touch consumptive government spending, rather than the primary investment activity crucial to long-term growth perspectives," the bank said.

Eichel's revised 2003 budget foresees new federal borrowing of 18.9 billion euros, 900 million euros higher than previously announced.

Eichel said Monday the government would also be seeking a further 13.5 billion euros this year, bringing new federal borrowing for 2002 to 34.6 billion euros.

The budget revisions come after Eichel last week unveiled huge tax revenue shortfalls for 2002 and 2003 and the European Commission launched disciplinary action against Germany as its 2002 budget deficit is set to breach the euro zone's 3 percent limit.

Eichel said the new taxes on capital gains, effective from Feb. 21, 2003, would have little short-term effect on the state's coffers. They should raise 325 million euros in 2004 and 650 million euros from 2005, he said.

Analysts said the new taxes could prompt a sell-off in shares and property and further damage investor confidence.

The Bundesbank, which reported that the economy grew only 0.25 percent in the third quarter, said the government should be cutting spending, not raising taxes, and urged it to tackle labor-market problems to revive growth.

The BGA foreign trade group slammed the government measures as "the greatest job destruction program of postwar history."