The Bundesbank urged the West German government not to relax efforts to rein in spending when taxes are cut in a 1990 fiscal reform package saying that higher expenditure could lead to a dangerous rise in interest rates. The Bundesbanks 1986 annual report said the governments choice of measures to compensate for any cut in tax income was a key political task. There will also be consequences for the states attitude on spending it said. It added that while tax cuts should have a stimulatory effect on the economy the government should not expect any significant increase in tax income in the short-term. The reform will cut taxes by a gross 44 billion marks of which 19 billion marks will be financed through as yet unspecified measures. The Bundesbank noted that reducing tax preferences and financial grants as well as raising some indirect taxes were being considered. As experience shows that a tax cut is not self-financing ... The question remains of how the rest of the tax cuts will be financed the Bundesbank said. The Bundesbank noted that in 1986 spending had increased by more than the three pct annual average rise for 1982 to 1986. If this three pct limit were exceeded over a long period there would be a danger that increased new borrowing would be necessary to finance deficits. It added that interest rates in West Germany were now low partly because of a high influx of foreign funds. But the situation would become more difficult if the governments credit requirements increased massively. The anticipated stimulatory effects on the economy from the tax cuts could be thrown into jeopardy by higher interest rates it said.
BUNDESBANK CALL TO BONN ON OVER-SPENDING RISKS