European Monetary Affairs Commissioner Mr Pedro Solbes has given his cautious backing to German plans to stimulate the economy with tax cuts, but warned Berlin not to breach the euro-zone's budget deficit guidelines next year.

Chancellor Mr Gerhard Schröder announced plans on Sunday to bring forward €18 billion in tax cuts next year to be financed by cuts in government spending and borrowing.

"The Commission welcomes tax cuts in general, but they need to be accompanied by commensurate expenditure restraint," said Mr Solbes in Berlin yesterday.

He said the Commission "expects that Germany will respect the political framework of European currency integration" and warned that tax cuts to "revive confidence" in Germany could breach that framework spending guidelines.

"The risk exists, but it is comparatively small," he said, adding that he was "very confident" Berlin would bring its deficit below 3 per cent in 2004.

Chancellor Schröder said yesterday that it would be "possible" but "difficult" to keep the budget deficit below the ceiling of 3 per cent of gross domestic product (GDP) next year.

Several years of negligible growth and soaring unemployment pushed up Germany's budget deficit to 3.6 per cent of GDP last year. Mr Hans Eichel, the finance minister, has said only a "miracle" will prevent a similar deficit this year.

His hope for next year is that tax cuts of 10 per cent on average will stimulate economic growth above 2 per cent.

But a deficit acceptable to Brussels also depends on economic growth of 0.75 per cent this year, something most economic institutes have already dismissed as highly unlikely.

Berlin's DIW economic institute yesterday forecast that Germany will breach the 3 per cent ceiling for a third time next year. Leading economists have warned that such a development might encourage the other 11 members of the euro zone to ignore the deficit rules.