Outlining the government's long-awaited plan to get finances back in shape in the wake of the global financial crisis, Merkel spoke of an “unparalleled show of strength” to put the nation's financial future back on a “firm footing.”
After an intensive, two-day cabinet session, the coalition government of Merkel's Christian Democrats (CDU) and the pro-business Free Democrats (FDP) has decided to slash €80 billion from the budget by 2014, including €11.2 billion next year, much of it from social benefits.
Alongside Vice Chancellor and FDP leader Guido Westerwelle, Merkel said both business and broader society would have to do their part in getting the budget back in balance.
Merkel said the goal of cuts to social spending would be to enhance the appeal of work over welfare. There would be cuts to Hartz IV unemployment benefits and to parental benefits known as Elterngeld – the latter of which Merkel described as “painful.”
New parents on a monthly net income of more than €1,240 will receive Elterngeld equalling 65 percent of their income, rather than the current 67 percent. The maximum rate will however remain at €1,800 per month.
Re-integration help for the unemployed, moreover, will be returned to 2006 levels.
Merkel stressed that a €12 billion increase in spending on research, education and development between now and 2013 would go ahead as planned.
Although there will be no increases in the rates of income or sales tax, present tax exemptions on energy will be abolished and an “ecological air transport tax” will be introduced. The energy industry will also be taxed on their profits arising from the extension to the lifespan of nuclear power plants.
The banking sector, meanwhile, will be slapped with a financial markets transaction tax, which the government plans to champion in Europe and beyond.
Cuts to the public sector, including 10,000 civil service jobs by 2014, would also deliver significant savings, Merkel said, stressing that a reduction to the armed services would be “not marginal” but rather “fundamental.”
Details were yet to be decided, she said. However a Bundeswehr reform commission would examine the impact of cutting 40,000 staff from the military's current level of 250,000, and report by the beginning of September.
Berlin's plan to rebuild the historic city palace or Stadtschloss will be the most immediate victim of the cuts, with the government announcing it will contribute no funds between 2011 and 2013.
Merkel said the goal was to stick to the debt limits set by the German constitution and the European Stability and Growth Pact, which order countries to keep their annual deficits below three percent of GDP and their national debt below 60 percent.
The actual 2011 budget will be announced in detail on July 7.
Vice Chancellor Westerwelle said: “We have in the last few years lived beyond our means. Nobody likes to save and yet it is practically necessary.”
He said it was a just savings packet in which business and society contributed an equal share.