Chancellor Angela Merkel said yesterday 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 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 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 eurozone’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 from 2005 to 2010. It has been taking in about €22 billion 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 centre-right coalition government has no majority.

In May, the Bundesrat blocked €6 billion worth of tax cuts that would have addressed this issue.

The opposition Social Democrats 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 eurozone debt crisis, its economy has started to cool appreciably this year.

Growth in Germany dropped to 0.3 per cent in the second quarter from 0.5 per cent in the first. The government is today expected to cut its expectations for growth next year to 1 per cent from a previous 1.6 per cent.

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 per cent to 5.3c 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 3.6c per kw/h in 2012.