Merkel's tax woes

Interior Minister Wolfgang Schaeuble, an influential figure in Merkel's Christian Democrats (CDU) party, told the newspaper Bild am Sonntag that tax relief in the current situation is unlikely.

"There is very little room for tax cuts and no one can say right now when the time will be right," Schaeuble said.

"New tax revenue estimates due later in May will show just how limited the scope for tax relief is."

Berlin is expected to slash its tax revenue estimates for 2009 by 48 billion euros ($64 billion) later this week.

However, Chancellor Merkel is sticking to her pledge. In an interview on German public television, she said that tax relief could help the stimulate sluggish German economy.

"We need to mobilize all our forces to foster growth," she said.

Merkel is promising a three-pronged approach of tax relief, deficit cuts and investment in education and innovation.

Schaeuble's doubts echoed

The difference in opinion doesn't end with Schaeuble. Several CDU state premiers had already criticized her plans to make tax relief a key plank of the party's election campaign program.

The CDU premier of Thuringia, Dieter Althaus, also said this weekend that his party had an obligation to be a guarantor of solid state finances.

Horst Seehofer, the head of the CDU's sister party in Bavaria, the Christian Social Union, also raised his doubts.

"One is not allowed to make promises that one can't keep to," he said.

The divisions over the tax issue could hurt Merkel in September's election, despite her current lead of 10 points over the center-left Social Democrats (SPD), her partners in government.

Merkel had been hoping she would coast to re-election this year on her economic record and the promise of tax cuts.

Things look rather different now, however, as the global financial crisis has plunged Germany into its deepest recession since World War II and the economic and fiscal gains from her first three years in office now just a distant memory.