Germany's finance ministry has triggered a fierce debate within the government after drawing up radical plans to solve the country's budgetary problems, kick-start the economy and raise its opinion poll ratings.

The plan, by Mr Hans Eichel, finance minister, to raise VAT and use the revenue to finance a drastic cut in non-wage labour costs was vetoed by Mr Gerhard Schröder, chancellor, and Franz Muntefering, chairman of the Social Democratic party, at a meeting in the chancellery on Wednesday.

But publication of its details is likely to spark strong reactions in the Green party, the junior member of the ruling coalition, and from the Christian Democratic opposition about raising VAT.

The slow pace of economic recovery, persistently high unemployment and a collapse in expected tax revenues are threatening to blow a hole in Mr Eichel's fiscal plans for 2004 and 2005 and ruin the credibility of the government.

The ministry estimates that raising today's VAT rate of 16 per cent by up to five percentage points would raise about €45 billion more than enough to keep the 2005 budget deficit below 3 per cent of gross domestic product and abide by the European Union's fiscal rules.

Part of the surplus could be used to fund a cut in employer and employee social security contributions, which would both lower labour costs and increase employees' disposable income. - (Financial Times Service)