Germany's fiscal deficit will top €40 billion this year, a record sum nearly double the previous forecasts that could yet rise to 5 per cent of gross domestic product (GDP) by the end of the year.
Mr Hans Eichel, the finance minister, admitted at the weekend that the government will break the previous national debt record held by the Kohl government.
Taken with the combined debts of the federal states, Germany is now €80 billion in the red.
"Up until now I've assumed the deficit would be approximately double the earmarked amount of 18.9 billion," he said on public television. "We shall pass the [€40 billion] mark because the present declining economic situation has seen income fall and at the same time we are forced to spend more on unemployment benefit."
Mr Eichel was until recently known as "Iron Hans" for his steely resolve to pursue fiscal discipline. But he caved in to pressure from Chancellor Schröder and his cabinet colleagues to abandon debt-reduction policies and to cut taxes and help the government spend its way out of the slump. He will have to borrow an additional €5 billion next year to finance tax cuts. To make matters worse, tax takings this year will be reportedly €8 billion lower than forecast.
"Three years of stagnation have ruined our consolidation successes of 2000 and 2001," he told news magazine Focus.
News of the record deficit will raise eyebrows in Brussels and elsewhere in the euro zone.
Mr Friedrich Merz, the deputy leader of the opposition Christian Democrats (CDU) said the huge deficit made Germany an "EU trailblazer for violating the terms of the Maastricht Treaty".
The announcement comes at the beginning of a crucial week for the government of Chancellor Schröder.
On Friday he will present a package of reforms designed to kickstart the eurozone's largest economy after three years of negligible growth. Proposals include measures to relax hire-fire laws for small companies and to pay out unemployment benefit only for a year.
Mr Schröder has threatened to resign if left-wing rebels in his Social Democratic Party (SPD) vote against the government to erode its four-vote majority.
