The Bundesbank urged the West Germangovernment 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 Bundesbank's 1986 annual report said the government's
choice of measures to compensate for any cut in tax income was
a key political task. "There will also be consequences for the
state's 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 government's
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.
 REUTER
