First the good news: Germany managed to reduce its national deficit to 2.5 percent in the first half of this year. The positive trend can be traced back to a broader economic upswing, which brought in increased tax revenues.

The public deficit isn't likely to increase in the second half of 2006, and Germany may even finally be able to shed its stigma in the European Union as the "stability pact rogue" -- an image it had earned through several years of higher-than-permitted debt statistics. The national deficit in the first half of 2005 was, for example, as high as 3.7 percent.

According to figures released Thursday by the Federal Statistical Office, the national deficit in the first half of this year amounted to 28 billion euros ($35.8 billion) in real numbers, which is a good 12 billion euros less than during the same time frame last year.

Social security contributions, on the other hand, have remained stagnant due to only minimal changes in wages. However, expenditures made by the government unemployment agencies this year dropped dramatically as a result of cutbacks.

Finance Minister Peer Steinbrück, who bore the consequences of the political demise of his predecessor Hans Eichel, is reluctant to be too hasty in celebrating the success reports, lest he eat his words in just a few months' time.

Tax hikes to maintain low deficit?

The government has emphasized that it will stick to its promise that, starting next year, Germany's national deficit will not exceed the maximum deficit agreed upon in the EU's stability pact. This contractual agreement stipulates that the deficit of all public budgets, including social security, may not exceed 3 percent of the country's gross domestic product.

Thanks to positive market conditions in recent months and the higher tax revenues that resulted, Germany won't violate the pact this year. Even a slight economic downturn will not prevent Germany from meeting the deficit standard in the future.

Now for the not-so-good news: In order to keep the deficit within the limitations set by the stability pact, hefty tax hikes are necessary.

At the beginning of 2007, sales tax will be raised from 16 to 19 percent. Tax increases in other areas are planned as well, though they won't be quite as big as the sales tax hike.

Taken together, tax revenues are expected to increase by more than 20 billion euros per year, which will keep Germany on the safe side as far as the stability pact criteria are concerned.

Cut spending instead of raising taxes

However, burdening the taxpayers in order to meet EU deficit criteria is problematic.

Federal, state and local expenditures will continue to increase, even if only slightly. Market fluctuation aside, Germany has a structural problem: Germans pay more in tax and social contributions than those in other industrial countries.

Considerable reductions in spending -- not another tax hike for the already burdened taxpayers -- would be a better approach to trimming down the national deficit.

Karl Zawadzky is Deutsche Welle's chief business correspondent. (kjb)