German conservative leader Angela Merkel defended on Saturday a plan to raise taxes if she wins an election in September despite criticism from industry, a political ally and the government, Reuters reported. Merkel told the Berliner Zeitung newspaper that a two-point hike in the country's 16-percent value-added tax (VAT), which has emerged as the key issue in the early stage of the campaign, would cut labour costs, boost economic growth and create jobs. She announced plans last week to raise the tax in order to lower by two points unemployment insurance, a tax which adds to the cost of employing someone. She says the reform would help create jobs in a country haunted by about 5 million unemployed and a jobless rate well above 10 percent. But the head of the BDI German industry federation, Ludolf von Wartenberg, added his criticism to that of Merkel's allies in the Free Democrat party and Chancellor Gerhard Schroeder's government who warned it would actually hit spending and growth. "By raising VAT by two percentage points we'll be able to quickly cut the supplemental wage costs by two points," Merkel said. "You can't look at only the increase. Looking at the whole picture you can see clearly why we're doing it." Her Christian Democrats (CDU) and their Bavarian sister party, Christian Social Union (CSU), have slipped about 5 points in opinion polls in the four weeks but still hold a commanding 14 to 18 point lead over Schroeder's Social Democrats. BDI leader Von Wartenberg told German radio on Saturday that raising taxes before cutting expenditures is a terrible blunder. "Why do they have to start off by raising the VAT?" he said. "Cutting spending should take priority. There are huge potential savings to be found by reforming the social welfare system." --more 1454 Local Time 1154 GMT
