ECA message files, lot 53 A 278, box 27, Frankfurt Toeca: Telegram
The United States High Commissioner for Germany (McCloy) to the Administrator for Economic Cooperation (Foster)1
priority
Toeca 551. Re: Our despatch 2919 March 13, 1951 ourtel to ECA/W 541 June 2, 1951.2 Subj: Recent trends in FedRep fiscal policies and relation to defense contribution.
1. Since Dec FinMin has pressed reluctant Parliament for new taxes to finance increased social and admin costs and, specifically, costs external security, mainly occupation. As result, FinMin secured new legis providing increased revenues from foil taxes: (a) Berlin aid, (b) petroleum products and (c) customs (by shift specific to ad valorem tariffs effective Oct). He has prepared draft law providing for increased taxes on: (a) corporations, (b) income and (c) transactions (turnover tax). These proposed measures held up pending agreement between Bundestag and Bundesrat. Comprehensive luxury tax legis was also drafted but subsequently dropped in favor token measure we calculate will raise only DM 50 million.
2. This development unfavorable our viewpoint since we hoped for enactment entire FinMin program and willingness FedRep attempt raise more revenue to finance defense contribution which was predicated on a figure higher than present level of occupation costs. While optimistic over prospects enactment his program as late as March, FinMin now says no further tax increases beyond draft laws still to be agreed by Parliament (see above). Resulting revenue increases-Will be used for 25 percent increase in pensions and probable 20–25 percent [Page 1635] increase in salaries civil servants, (actually already raised 15 percent by admin order effective April 1). Govt accepted pension increase under pressure all parties and civil servants threaten strike obtain remainder of salary increase demanded.
3. We think inability govt to secure enactment complete tax program and prevent increased welfare and admin expenditures directly related to opposition financing higher occupation costs in absence agreement on Germany’s role in Western defense system. Attitude of Parliament underwent pronounced change in April, when considered 1950–51 occupation costs budget plan and Carlo Schmidt (SPD) led attack, joined by spokesmen all parties, on (a) continued occupation costs arbitrarily imposed, (b) delay in achieving greater degree sovereignty for Ger and (c) asked why portion of occupation costs arising from Western defense shld not be financed from central fund provided by all participating countries.
4. Subsequently, pressure from all parties has forced govt to reconsider new level and components of occupation costs. A clear indication of change in govt position demonstrated by Schaeffer, in FinCom mtg May 29, who stated (a) no further tax increases beyond those already scheduled, (b) expenditures social welfare will be raised and (c) only 5 billion of occupation cost budget fiscal ‘52 can be financed from ordinary budget and balance cash requirements, will be financed thru extraordinary budget by public loans or Central Bank credit. (Reasons for placing balance in extraordinary budget was that this represented capital expenditures).
5. Unwillingness of govt to increase revenue beyond that provided in pending legis and to suppress increased nondefense expenditures weakens possibility obtaining satisfactory defense contribution. Total expenditures Federal, laender and local already nearing 30 percent of GNP and thus rigidities being created which lessen possibility increasing revenue for defense.
6. We think that the only development that would bring about a basic change in present govt fiscal policies would be conclusion of understanding on the role Germany in Western defense and on the magnitude and composition of a defense contribution.
7. Detailed revised estimates combined budgets going forward soonest.