BERLIN (Reuters) - 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 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.
Merkel's government wants to reform the tax code to reduce the impact of "bracket creep", but the opposition has blocked that in the upper house Bundesrat, where Merkel's center-right coalition government has no majority.
In May, the Bundesrat blocked 6 billion euros worth of tax cuts that would have addressed this issue. The opposition Social Democrats (SPD) said it was irresponsible to cut taxes at a time of budget consolidation.
Even though Germany long seemed immune to the slowdown gripping much of Europe due to the euro zone debt crisis, its economy has started to cool appreciably this year.
Growth in Germany dropped to 0.3 percent in the second quarter from 0.5 percent in the first. The government is expected to cut on Wednesday its expectations for growth next year to 1 percent from a previous 1.6 percent.
Merkel said there was also a need to reform the surcharge levied on consumers to pay for renewable power after Germany's four high-voltage network operators announced on Monday that it would rise 47 percent to 5.3 cents per kw/h next year.
Merkel said it was not right that so many companies were exempt from the surcharge, throwing her weight behind critics of the system who complain the exemptions are responsible for the planned steep increase from 3.6 cents per kw/h in 2012.
"We've got to take another look at this and see if it was right to give so many corporate exemptions to companies that are not facing international competition," Merkel said. "Right now there are more companies exempted than are facing international competition."
She said the Renewable Energy Act (EEG) that has helped make Germany a world leader in renewable energy - getting 25 percent of its electricity from wind, solar and biomass - needed to be reformed because of the sharply rising surcharge costs.
"I see an urgent need to reform the Renewable Energy Act," she said.
Additional reporting by Gareth Jones and Andreas Rinke; editing by Stephen Nisbet