Germany braces for sharp VAT hike

The rate of value-added tax (VAT) in Germany looks set to rise to 19% from the beginning of 2007.

The lower house of Germany's parliament approved the 3% hike - which would be its biggest tax increase since World War II.

The move is expected to be ratified by the upper house next month.

But economists have warned the increase will reduce consumer spending, hitting Germany's economy just as it has started to show signs of recovery.

The plan was passed in the Bundestag by 396 votes to 146 and will now be referred to the upper house, or Bundesrat.

Germany's top-selling daily news paper, Bild, had appealed to MP's with a front page headline: "Say no to the tax craziness".

Export reliance

It is estimated the VAT change will raise an extra 20bn euros ($25.4bn; £13.6bn) a year in taxes.

Chancellor Angela Merkel's government wanted the change to help reduce the budget deficit to below the European Union limit of 3% of GDP.

Another third of the revenue will be used to cut payroll taxes for employers - which the government hopes will allow more job creation to tackle the 11% unemployment level.

After years of stagnation, consumer spending in Germany has been slowly picking up, with the country relying on exports to propel growth.

German economists predict that economic growth will fall to 1.2% next year, from 1.8% in 2006.

In the first quarter of 2006, GDP grew by only 0.4%, which was below expectations.