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unlikely to see sweeping tax cuts any time soon despite a victory for the center-right in Sunday's federal election Wholesale NHL Jerseys , as a swollen budget deficit restricts the new government's room for maneuver.
The win for Chancellor Angela Merkel's conservatives and the business-friendly Free Democrats (FDP) gives the new partners a mandate to pursue their campaign pledges to reduce taxes, but any such cuts will likely have to wait at least a year.
Investors and economists welcomed the projected result, which would free Merkel's conservatives from the awkward "grand coalition" in which they ruled for the last four years with the center-left Social Democrats (SPD).
"It's a good outcome for Germany," said Andrew Bosomworth, a senior portfolio manager at Pimco.
He hoped the change would result in a simplification of Germany's tax system and cuts to public spending Wholesale NHL Jerseys , which the FDP has campaigned for.
Europe's biggest economy has just emerged from its deepest recession since World War Two but the recovery is fragile. Lower tax revenues, combined with higher welfare payments, are putting the public finances under strain.
Germany's budget deficit is expected to reach 6 percent of gross domestic product (GDP) in 2010 -- twice the European Union limit -- and federal new borrowing has been earmarked at a record 86 billion euros ($126.3 billion) for next year.
DIFFICULT BALANCE
"It will be enormously difficult for the government to strike a balance between reducing state debt and consolidating the budget at the same time as stimulating growth," said Andreas ReesWRAPUP 1-Golf-Everyone in the mix at wide-open Open_3524, economist at UniCredit.
Additional pressure on public coffers is likely to kick in next year Wholesale NHL Jerseys , when unemployment is expected to rise above 4 million, and the German government risks incurring EU disciplinary action unless it tackles the deficit.
"I don't think they're going to just walk in there and start slashing taxes, but that could happen in conjunction with expenditure cuts in other areas and that will take a bit of time," said Bosomworth at Pimco.
So far, rises in joblessness have been limited by a government program that subsidizes workers' pay and benefits when they are shifted from regular to shorter working hours.
The budget deficit could rise further if firms lay off workers who had been on short-time contracts, said Bosomworth.
Gianluigi Mandruzzato, fixed income strategist at BSI, expected the new government would not cut taxes until 2011.
"I think given the constraints that are coming from the current situation in the budget, the reduction (in taxes) will only be implemented in progressive steps Wholesale NHL Jerseys ," he added.
REBALANCING ACT
The new government will face domestic and foreign pressure to reform the economy. Germany was the world's biggest exporter of goods last year but the domestic economy is marked by stagnant consumer spending and firms want cuts to taxes.
Industry immediately pressed for reform.
"State spending on areas such as social welfare, subsidies and developm