German chancellor proposes corporate tax cuts

The embattled German chancellor, Gerhard Schröder, today proposed a cut in corporate taxes as part of a number of new measures to accelerate growth in Europe's largest economy.

The chancellor said big business tax rates would be cut from 25% to 19% in a move funded by higher duties on dividends.

With unemployment rates running at 5.2 million, a postwar record, and reports showing poverty is increasing, Mr Schröder is under pressure to reverse the bad economic figures. Polls suggest his Social Democrats and Greens coalition is likely to lose an election in North Rhine-Westphalia on May 22. Effectively, that will be a mid-term election, as it is the country's most populated state.

Also included in today's announcement was a €2bn (?1.4bn) investment in transport infrastructure and €250m (?174m) in aid to help the elderly long-term unemployed.

However, his reform agenda received a mixed reaction, with some analysts doubting the package would have much effect on Germany's stubborn unemployment problem.

Mr Schröder told the German parliament that the steps, which have yet to get the required approval from the conservative opposition, were an extension of Agenda 2010, a programme of labour-market reforms set up two years ago.

"We need to do something in the short term," Mr Schröder said. "This package of measures is wise and desirable given the huge risks posed by international crises and external economic factors."

Economists said Mr Schröder's speech sent a positive signal, but contained no miracle solutions for unemployment. "The corporate tax reform is good, but I don't expect it will have any impact on jobs," Hans-Werner Sinn, the head of Germany's respected Ifo economic research institute, told Reuters.

"A reduction in the base corporate tax rate would be positive for companies, but it is not the heart of the problem," LBBW equity strategist, Frank Schallenberger, told the BBC. "The main problem is high social costs and high unemployment. I don't see any solutions to these problems so far."

The steady increase in joblessness, partly due to statistical changes accompanying unpopular benefit cuts, has cast a cloud over an economic recovery already threatened by high oil prices and a strong euro.

Economists expect German gross domestic product to grow by only about 1.0% this year, after a 1.6% expansion in 2004. German companies like carmaker Opel and retailer Karstadt have made headlines in recent months with plans to cut thousands of jobs.