Germany sharply revised up its tax revenue estimates for 2006-2007 on Friday, boosted by the strongest growth in six years and leading the government to make fresh cuts to labour costs that should shore up consumption.
The latest estimates for Germany's total tax take projected additional revenues of 19.4 billion euros ($24.8 billion) for this year and 20.1 billion euros for 2007, compared to previous forecasts made in May, the Finance Ministry said.
"The economic dynamism is significantly stronger than was assumed in the spring," the ministry said. "And the upswing is increasingly spreading over onto the domestic economy."
Buoyed by the leap in tax revenues -- which rose by nearly eight percent on the year in the first 9 months of 2006 -- the government scaled back its new borrowing plans to the lowest level since re-unification in 1990, the ministry said.
Stemming the tide of Germany's rising debt of over 1.5 trillion euros was one of the chief priorities of Chancellor Angela Merkel's ruling coalition when it took office a year ago.
The Economy Ministry has forecast economic growth of 2.3 percent for 2006, which would be the best result since 2000. For 2007 it sees growth of 1.4 percent, partly due to the negative impact of a 3 percentage point increase in sales tax on January 1.
The rise in value added tax (VAT) is due to boost the tax take next year, but is expected at the same time to seriously crimp private consumption, which accounts for around 60 percent of gross domestic product in Europe's largest economy.
Total tax revenue at federal, state and local government level was seen at 484.9 billion euros in 2006 and at 514.1 billion in 2007. In May, total tax revenues of 465.5 billion euros for this year and 494 billion in 2007 were forecast. "It's a classic cyclical pick-up in the tax revenues," said Bernd Weidensteiner, a DZ Bank economist in Frankfurt.
Earlier on Friday, Finance Minister Peer Steinbrueck said the government would use some of its extra cash to lower mandatory contributions to unemployment insurance to 4.2 percent of gross wages in 2007. A cut to 4.5 percent from 6.5 percent at present had been planned.
Split between workers and employers, these levies are part of Germany's total non-wage labour costs, which are among the highest in the world and seen as a big hindrance to investment.
The government has determined to cut them permanently below 40 percent of gross wages, though according to a Reuters calculation they will drop to some 40.4 percent at best in 2007. Despite the unemployment insurance cut, higher levies for pension and healthcare will raise the total at least 0.7 points.
Steinbrueck said that the strong tax revenues meant federal net new borrowing would come in below forecast. Having initially earmarked a sum of 38.2 billion euros for this year, he said a figure of around 30 billion euros was now likely.
Next year, net new borrowing will drop to around 19.6 billion euros, he added, and DZ Bank's Weidensteiner said there was a good chance that it could end up being lower still.