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Solidarity Pact I (March 16, 1993)

In March of 1993, representatives of the federal government, the parties, and the minister presidents of the Länder [federal states] agreed on the so-called Solidarity Pact I, which took effect in 1995 and remained in force until 2004. It replaced the German Unity Fund and made various special federal government funds available to boost the economic development of the new states. The agreement provided for a number of measures, including the introduction of a solidarity surcharge and the revision of the State Fiscal Equalization Scheme. The response from the German press was critical. The Solidarity Pact II, negotiated in 2001, took effect in 2005 and will remain in place until 2019.

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The Agreement on the Solidarity Pact

During a closed conference, which brought Chancellor Kohl, the leaders of the parties and parliamentary groups, and the minister presidents of the federal states together at the chancellor’s office in Bonn from March 11-13, a basic agreement was reached on the extent and details of the Solidarity Pact as a package of measures to finance the repercussions of German reunification. The parties agreed on the imposition of a solidarity surcharge of 7.5% on the income tax, effective January 1, 1995 (this was to generate additional income of 28 billion Marks for the federal government), an increase in the private wealth tax with a simultaneous raise in the exemption, and the renunciation of the originally planned cuts in statutory social benefits and funds for job creation measures in East Germany. The points were included in the “Federal Consolidation Program” in the form now agreed upon or introduced into the negotiations as the basis for discussion; in March, the federal government passed the program, which envisaged savings of 18 billion Marks. In the current negotiations, the Social Democrats were unable to push through their demand for the introduction of a labor market levy. The Federal Labor Office in Nuremberg will receive an additional two billion Marks to allow it to reverse a freeze on authorizations for job creation measures (JCM) imposed in February; these funds will pay for 225,000 JCM jobs in the new federal states and 20,000 in the old states. The new federal states will be integrated into the federal financial system as equal members beginning in 1995. Representatives from all parties had positive things to say about the compromise that was reached, and the East German minister presidents expressed satisfaction with the revision of the State Fiscal Equalization Scheme, which, they maintained, would make the work of reconstruction easier, while the heads of government of the old [i.e., West German] states were of the view that the arrangement that had been achieved was acceptable, that the financial unity of Germany had been placed on sound footing from 1995 on, and that citizens no longer had to live with uncertainty about additional financial burdens that were coming.

The plan calls for the federal states to receive 44% instead of the previous 37% of sales tax revenue beginning in 1995; in this way they will receive around 55.8 billion Marks a year in fiscal equalization transfers and an additional 2.8 billion Marks in services to retire old debts in the area of East German housing construction, and – from the Credit Institute for Reconstruction – around a billion marks in lower interest rates to boost the program for housing modernization. However, the federal government foregoes a share of the sales tax only on the condition that it succeeds in saving additional expenses to the tune of 4.35 billion Marks, a sum that was previously supposed to come from an across-the-board cut in social services.

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