German Chancellor Mr Gerhard Schroeder said today EU budget rules should be used to back growth as Berlin predicted a big shortfall in tax revenues but ruled out tax hikes or spending cuts to plug the hole.
The German Finance Ministry said revenues for the public sector as a whole over 2004-07 would be €61 billion ($72.1 billion) short of previous estimates, casting doubt on the country's ability to comply with the EU's Stability and Growth Pact on budget discipline.
"We have to create the possibility in the current situation to apply the Stability Pact...in a growth-oriented way," Mr Schroeder told a news conference in Paris after a joint meeting of the German and French cabinets.
The tax projections were worse than what German Finance Minister Mr Hans Eichel described as "cautious" estimates drawn up ahead of a meeting this week of tax revenue experts and jarred with data today showing first quarter growth was above forecasts.
Mr Eichel said the German government would try to boost revenues in 2005 through privatisations and trimming subsidies for homeowners, but was vague on how it would tackle 2004's expected shortfall.
He also ruled out new austerity measures, saying Germany's recovery remained fragile despite the first quarter growth data.
"Tax hikes or more rigorous spending cuts would be the wrong answers to this development. They would be poison for the recovery which has not yet firmly taken root, a recovery we need for our savings efforts to succeed," Eichel said.
Even before the data, the government's 2004 budget was in trouble, after Bundesbank profits fell three billion euros short of forecast and the government was forced to cancel a road toll project expected to garner around two billion euros a year.
Eichel said the 2004 budget gap was likely to be 10 to 11 billion euros above earlier projections.