BERLIN (Reuters) - The German government this week raised its 2018 growth forecast to 2.4 percent from 1.9 percent after bullish economic data, which could translate into added tax revenues.
That would give more leeway to increase state spending over the next four years beyond what is currently envisaged in coalition talks, and potentially lower taxes.
German Chancellor Angela Merkel said on Thursday strong economic growth offered scope to further expand government spending, which could help her conservatives hammer out a coalition deal with the Social Democrats.
Merkel, speaking after a meeting with leaders of the country’s 16 state governments, said the revised growth forecast clearly offered “additional margin” for coalition negotiators.
Talks on ending over four months of political limbo are seen likely to stretch into next week despite agreements on migration and pensions, politicians said on Thursday.
Investors worry the long failure to form a new government is delaying reforms at home and in the European Union, after an earlier attempt at a coalition with smaller parties collapsed in November.
Senior negotiatiors will meet again late on Thursday to discuss education, digital matters, finances and health care.
To secure a fourth term in office, Merkel needs the center-left Social Democrats (SPD) to agree to a re-run of the “grand coalition” that has ruled Europe’s biggest economy since 2013.
The party’s roughly 440,000 members could yet sink any deal as they have the final say in a ballot.
The JUSOS youth wing of the SPD and other leftist members are deeply opposed to rejoining a coalition under Merkel, fearing it will decimate their support.
A new poll by infratest dimap showed the SPD would win only 18 percent of the vote if new elections were held on Sunday, a drop of three percentage points from last month, and well below the 20.5 percent the party won in the September elections.
But the prospect of added spending could allow negotiators to fund new education and digitalization projects that could appease some leftist SPD voters.
Negotiators reached agreement on Thursday on pension contributions, adding to consensus already reached on climate goals and family reunions for migrants. Differences remain on labor law, health reforms and taxes.
They agreed to guarantee a pension level of 48 percent of average income, with contributions to be capped at 20 percent.
Horst Seehofer, the combative conservative leader of Bavaria, remained skeptical about boosting additional government spending beyond a planned 46 billion euros through 2021, the basis of a blueprint agreed in exploratory talks last month.
On Thursday, Germany’s lower house of parliament voted to extend a ban on reunions of migrants until the end of July, agreed by would-be coalition partners just two days ago. The existing suspension, introduced in 2016, had been due to expire.
Merkel’s Bavarian allies have dug in their heels against more generous migrant policies demanded by the SPD.