Government Prepares Germany For Tough Budget Cuts Ahead

IT is no wonder that German Finance Minister Theo Waigel wanted to trade his job in Bonn for the premiership of Bavaria in Munich.

Having lost the political contest in that state last week, he is now stuck with the unpleasant task of making major new cuts in the federal budget.

The special finance package that was supposed to pay for German unification - the so-called "solidarity pact," expected to be passed by the German Bundestag today - will be insufficient to do the job.

The reason is the worsening German economy, which analysts expect to contract by 2 percent this year. As the economy shrinks, so do tax revenues. The government predicts a shortfall of more than 100 billion deutschmarks ($61 billion) from now through 1996 - DM 25.8 billion ($15.8 billion) for 1994 alone.

German unemployment is expected to hit 3.5 million this year and continue increasing next year. As people are laid off from their jobs, they pay fewer taxes, have less disposable income, and cost the state more in unemployment benefits.

German Chancellor Helmut Kohl gave the first signal that it is time to tighten belts at a Cabinet meeting May 20, when he abruptly suspended planned pension increases for farmers' wives and told all his Cabinet members to prepare for "massive reductions" in their budgets.

Mr. Waigel has been repeating the austerity message, trying to get the public and lawmakers accustomed to the idea of harder times ahead. On Tuesday he announced that cuts of at least DM 20 billion ($12.2 billion) will have to be made in the 1994 budget.

Waigel has ruled out an increase in public-sector borrowing or further tax increases to plug the deficit, which economists fear may turn into a structural deficit. Germans will already be paying 7.5 percent more income taxes in 1995 to pay for reunification.

That leaves no choice but to cut back federal spending, including social programs.

"A major political storm is brewing," comments Die Welt, a conservative daily newspaper, predicting that "it is primarily the social service budgets which will be affected."

Waigel is proposing the controversial measure of reducing unemployment benefits. This week Friedhelm Ost, chairman of the economics committee in the Bundestag, suggested restructuring the country's pension system. Chancellor Kohl, however, immediately dismissed Mr. Ost's idea.

Details on cuts will be known by July 13, when Kohl's Cabinet is scheduled to pass the new 1994 budget plan. Since the solidarity pact turned out to be a package of tax increases instead of significant sacrifices as originally conceived, political observers here are asking how the government will find the will to cut back spending.

Even as Waigel talks austerity, the government is working on a major health care plan for long-term hospital and nursing home care. Germans may have to give up two paid sick days a year to pay for it. Germany's unions have threatened to strike if this financing method is actually adopted.