Chancellor Angela Merkel said on Tuesday Germany needs to stimulate domestic economic demand and urged opposition parties to stop blocking proposed tax cuts in the upper house of Parliament.
Merkel told business leaders Germany should end the automatic progression of workers into ever higher tax brackets due to inflation, which siphons more than 20 billion euros ($26 billion) out of the economy each year. She also renewed her calls for cuts in pension contributions as another way to boost purchasing power.
“Growth in Germany can at the moment be stimulated by an increase in domestic demand more than anything else,” she said.
Germany has come under pressure to boost domestic demand to relieve pressure on the euro zone’s struggling periphery during the sovereign debt crisis.
Merkel has also encouraged German firms to give their employees higher wage increases this year.
The battle over whether to cut taxes is also shaping up into a key issue ahead of next year’s federal election, where Merkel will be seeking a third term.
In Germany’s tax code, “bracket creep” generates billions of euros in revenues for the treasury because tax brackets are not adjusted for inflation.
The system has not been changed since 1958 and the state took in an extra 76 billion euros from 2005 to 2010. It has been taking in about 22 billion euros a year since 2010.