Germany delays tax cut for floods

BERLIN, Aug 19 (Reuters) -- Chancellor Gerhard Schroeder delayed seven billion euros ($6.89 billion) of tax cuts for Germans on Monday to help fund the rebuilding of flood-damaged eastern Germany, in a move that may help revive his chances of winning the September election.

The surprise one-year postponement of tax cuts scheduled for 2003 is a gamble for Schroeder, well behind his conservative opposition in opinion polls at a time of feeble economic growth.

Delaying tax cuts would appear to be suicidal just one month before a general election, especially as they are part of tax reforms that are a centrepiece of Schroeder's economic policy. The government also imposed a spending freeze.

But Schroeder is riding a wave of national solidarity now sweeping Germany as tens of thousands heave sandbags to protect cities from floods that have devastated homes and businesses across the former Communist east.

His move stands to win votes in the east, a key region in the election because it has many swing voters. Meanwhile westerners' sympathy for the flood victims could override frustration at the absence of promised tax cuts.

"We believe that this is something that the population will understand as a measure that is necessary to counteract the extent of this catastrophe -- that everybody can see and feel -- that is our duty,'' Schroeder told a news conference.

He said the only alternative to shelving the tax cut would have been to raise government borrowing and risk breaching European Union budget deficit rules, just months after the government narrowly avoided an EU rebuke for its 2001 deficit.

The opposition conservatives, who hold a majority in the Bundesrat upper house of parliament which would have to approve the tax move, said they were willing to talk about a delay, but were critical.

Plan one-sided, says Stoiber

Edmund Stoiber, conservative challenger to Schroeder, said the government's plan was one-sided because it put a burden on ordinary taxpayers and small businesses, the main beneficiaries of the 2003 tax cut.

"What we need now is cross-party consensus,'' Stoiber said.

Some estimates put the overall costs of the flood damage in Germany alone at more than 10 billion euros ($9.84 billion) but Schroeder said he could not be definite about a final figure.

The floods have given Schroeder the chance to show strong leadership, and are distracting voters from recent negative headlines and bad economic data that commentators said had killed his chances of a second term.

Incumbents usually benefit in times of crisis, political analysts said, noting the surge in support for Schroeder after the September 11 attacks on U.S. cities as well as bonuses for other politicians who have handled similar floods in the past.

Schroeder said the government would set up a Flood Disaster Solidarity Fund to pay aid to flood victims who had lost their homes and fund repairs to roads, bridges and railway track.

A further 1.2 billion euros will come from EU funds.

The president of left-leaning economic think-tank DIW, Klaus Zimmermann, praised the delay and said it was unlikely to hamper growth in Europe's largest economy.

"It's a brave step and I welcome it,'' said Zimmermann. ``It means consumers won't have the money, but it will definitely be spent, in this case by the state.'' Others were critical.

Adolf Rosenstock, an economist at Nomura International, said: ``A delay, even by one year, would have a major impact on growth and household consumption as well as corporate financing and investment decisions.

Calculate backwards

"You would have to calculate back out again all the positive effects from the tax cuts that you had calculated into your economic outlook.''

Economists at leading banks and institutes have been lowering their forecasts for German growth to just over two percent as a result of uncertainty about the U.S. outlook, the strengthening euro and falling stock markets.

The tax change being delayed is the second stage of the government's tax reform package, and will raise the annual tax-free allowance to 7,426 euros from 7,235. It will also cut the entry rate of income tax to 17 percent from 19.9 percent, and the top rate to 47 percent from 48.5 percent.

The third and final stage of the landmark reform will be implemented in 2005 as planned, cutting taxes by an additional 19.2 billion euros, the government said.