Germany's Angela Merkel, the favourite to beat Chancellor Gerhard Schroeder in September elections, won backing on Friday for the most controversial part of her platform, a plan to raise Value Added Tax (VAT). Merkel, leader of the Christian Democrats (CDU), faced a stand-off with powerful state premiers, unwilling to drop claims on VAT revenues, which they share with the federal government.
The conservatives have signalled that they will push for tougher labour and pensions laws, increase the retirement age and shake up energy regulation to extend the life of nuclear power stations and cut back renewable energy targets.
But the VAT hike proposal, set to be unveiled as part of the CDU's election platform on Monday, touched on some of the most sensitive issues the conservatives will have to address if, as opinion polls suggest, they win the planned September poll.
The CDU is expected to propose lifting standard VAT to 18 percent from 16 percent, raising up to 16 billion euros for Germany's public purse.
Conservative state premiers had resisted Merkel's efforts to transfer the tax fully to the federal government and use the income to hold down social welfare contributions.
High non-wage labour costs, largely in the form of heavy social contributions, are seen as one of the main impediments to cutting Germany's five million unemployment total.
Under current rules, the states would be entitled to 47 percent of VAT revenues. But they appeared to have dropped their opposition after talks on Friday. "I think the basic things are clear," Hesse state premier Roland Koch said after a meeting with other conservative state premiers.
Final details are due to be hammered out between Merkel and Edmund Stoiber, the influential Bavarian leader of the Christian Social Union (CSU), over the weekend.
The stand-off was seen as a major test of Merkel's ability to stand up to the powerful men in her own party and carry through with wider reaching reforms.
"The Chancellor candidate must resist all the greediness of the Union barons," Germany's biggest daily Bild said in an editorial, referring to the CDU and CSU. "Then and only then will voters be ready to bite the bullet on VAT."
The dispute over VAT underlines how difficult many of the choices facing a future conservative government would be given the dire state of Germany's public finances.
Some economists, as well as Schroeder's centre-left government, say an increase would exacerbate one of Germany's most pressing economic problems, weak consumer spending.
But on the other hand, it would also offer a welcome injection of cash for badly strained state and federal budgets that have broken European Union borrowing limits for the past three years and are set to do so again for several years more.
Merkel said in an interview with the weekly Die Zeit that Germans would be willing to accept a VAT hike if the revenue were used to cut social security and health care contributions.
Other issues, such as planned cuts to corporate and income tax and labour market reforms, appear to be settled.
President Horst Koehler and Germany's top court still need to rule on Schroeder's early election plan before the vote can happen. Koehler has until July 22 to make his view known.