The German Chancellor Mr Gerhard Schröder has announced plans to bring forward multibillion euro tax cuts in an attempt to breathe life into the German economy.
The €25 billion package of increased tax cuts for next year, €18 billion more than planned, will be financed by cuts in subsidies, the sale of government shares in former state monopolies and additional borrowing.
"We want a signal of revival to go out \ this government is improving the conditions for more growth," Mr Schröder told reporters after a weekend conference with his cabinet near Berlin.
"This step is aimed at spurring consumption and boosting economic growth. We might not achieve expected growth of 2 per cent next year without speeding up tax cuts."
Next year's tax cut combines the 2004 and 2005 cuts and will reduce the top tax rate to 42 per cent from 48.5 per cent and the lowest rate to 15 per cent from 19.9 per cent.
That will give the average working German 10 per cent more take-home pay next year, according to Mr Schröder.
Government finance experts have calculated that the tax cut could help the economy grow by up to an extra percentage point next year, assuming workers spend the extra cash and don't save it.
The tax-cut plan has caused concern in Brussels, where there is a fear that it might open up the possibility of Germany breaching the stability pact guidelines on budget deficit for the third consecutive year in 2004.
Mr Wim Duisenberg, president of the European Central Bank (ECB), said last week he was "concerned about the direction" of Germany's budget plans.
"The direction means higher debt levels even though they need to be brought down," he told German television.
Mr Schröder moved to reassure the ECB and the European Commission yesterday, saying that Berlin would work to bring its budget deficit under the prescribed 3 per cent debt GDP ratio next year.
At home, the tax plans have been opposed by hard-pressed state governors who are unsure of how they will be able to make up the €10 billion they will lose in tax revenue.
The Bundesbank gave a qualified welcome to the plan, but has also expressed concern that Mr Schröder has put the tax-cut cart before the horse of reform.
"First the government has to make clear where it wants to save the money for the tax cut," said Mr Hermann Remsperger, the Bundesbank's chief economist.
Opposition conservatives, whose support in the upper house is necessary to enshrine the new tax plans in law, have similar concerns.
"We are all in favour of tax cuts but they must be seriously financed. I say reform first then tax cuts," said Mr Friedrich Merz, deputy leader of the CDU and the party's finance spokesman.
The tax-cut announcement came after a weekend retreat in a 19th century palace near Berlin where the cabinet debated recipes to reverse its waning fortunes.
Since winning re-election last September, support for the government has slumped along with the economy, which is now flirting with recession.
Bankruptcies are at an all-time high and unemployment is heading in the direction of 11 per cent by the year-end.
