VATOLOGY:

Germany's Tax-and-Spend Tango: After struggling for years, the German economy finally appears to be on the upswing again. So why is the government in Berlin so annoyed? (Marc Young, 5/01/06, Der Spiegel)

Germany's leading economic institutes on Thursday raised their growth forecast for this year, which you'd think would be cause for celebration for Chancellor Angela Merkel's coalition of Christian and Social Democrats. But instead of being giddy with glee that the German economy seems to be shaking off its torpor, officials from the Finance Ministry have attacked the institutes' assessment of 1.8 percent growth in 2006 as far too optimistic. [...]

[T]he prospect of a booming economy could make it hard for Berlin to justify its plans to raise taxes and keep the public spending gushing next year. That, at least, would certainly explain all the government's grousing. Because if growth is in fact on the rise it does indeed make little sense to raise Germany's value-added tax (VAT) from 16 percent to 19 percent starting in 2007 as the government wants.

While such a move would provide Berlin with a huge budgetary windfall, it would likely be lethal for Germany's long-miserable domestic demand. For years, German consumers have been masterly miserly and stupendously stingy. But according to a consumer sentiment survey released on Wednesday, people this spring have finally started to reach for their wallets again.

Of course, some economists believe it's the fear of the coming VAT hike that's spurning shoppers to make purchase this year before everything becomes 3 percent more expensive. But especially in light of an expected economic slowdown next year -- growth is likely to drop to an anemic 1.2 percent in 2007 -- the government might want to consider taking advantage of the stronger economy to abandon its potentially hazardous tax plans.

It does nicely put to rest the notion that a VAT gives the government the capacity to secretly raise taxes, but oughtn't Germany be raising taxes and cutting spending if it hopes to keep its welfare state alive for a few additional years?

Posted by Orrin Judd at May 1, 2006 4:21 PM