Germany's improving economy -- plagued for so long by meager growth -- finally appears to be making an impact on the government's budget deficit. Rising tax revenues have helped cut the deficit to 2.5 percent of gross domestic product in the first half of 2006, according to figures released on Thursday by Germany's Federal Statistical Office.

Barring some unforeseeable events, that means Berlin will likely fulfill the European Union deficit rules after breaching the 3.0 percent limit for the past four years.

As the largest economy in the euro zone and once a leading proponent of fiscal discipline, Germany has come under considerable fire for its deficit woes in Brussels. The latest figures pointing to Germany's return to the camp of budgetary propriety will likely ease minds both at the European Commission and the Finance Ministry in Berlin. However, they could create some domestic political turbulence for Chancellor Angela Merkel.

In an attempt to get the country's budget back in line with EU rules, Merkel pushed through an unpopular increase in the value-added (sales) tax from 16 to 19 percent in 2007. But now with Germany set to dip below the 3.0 percent limit even before the hefty tax hike, there are sure to be growing calls to postpone or even repeal the VAT increase before it comes into effect.

Some economists even worry the tax hike could strangle Germany's fragile domestic consumer demand, which has only begun to recover this year. That could, in turn, stifle the economy which might then push Berlin back over the EU budget deficit limit.

But German Finance Minister Peer Steinbrück -- a staunch defender of the tax hike -- contended that Germany will need the extra revenue in order to stay under that limit in the longer term. "We are at the beginning, not the end, of the urgently needed consolidation of public budgets," he said in a statement.

The Federal Statistical Office also confirmed that the German economy grew by 0.9 percent in the second quarter and 0.7 percent during the first three months of the year. That was the fastest quarter-on-quarter growth rate since the first three months of 2001, according to the Associated Press.