It's a clear sign that something odd is afoot when a government gets peeved when told the economy is improving. But that's just what happened in Berlin this week.

Germany's leading economic institutes  on Thursday raised their growth forecast for this year , which you'd think would be cause for celebration for Chancellor Angela Merkel's coalition of Christian and Social Democrats. But instead of being giddy with glee that the German economy seems to be shaking off its torpor, officials from the Finance Ministry have attacked the institutes' assessment of 1.8 percent growth in 2006 as far too optimistic.

"We find the quality of our own experts more convincing, we'd rather trust their expertise," pooh-poohed a ministry spokesman in the economic equivalent of a professional wrestling smackdown.

Huh? Such a dismissive response might be expected were the institutes overly pessimistic in their outlook, but what interest could the government possibly have in talking down its own economy? Plenty, it seems.

Twice a year, the Germany's six top economic institutes release their highly anticipated fall and spring surveys, essentially taking the temperature of the world's third largest economy. Their growth forecasts are taken very seriously in the financial markets and in the business community. If the institutes revise their economic outlook -- as they did on Thursday -- the government is normally all but certain to follow suit and tinker with its own growth forecasts.

Spoiling Berlin's tax plans

The only problem this time is that the prospect of a booming economy could make it hard for Berlin to justify its plans to raise taxes and keep the public spending gushing next year. That, at least, would certainly explain all the government's grousing. Because if growth is in fact on the rise it does indeed make little sense to raise Germany's value-added tax (VAT) from 16 percent to 19 percent starting in 2007 as the government wants.

While such a move would provide Berlin with a huge budgetary windfall, it would likely be lethal for Germany's long-miserable domestic demand. For years, German consumers have been masterly miserly and stupendously stingy. But according to a consumer sentiment survey released on Wednesday, people this spring have finally started to reach for their wallets again.

Of course, some economists believe it’s the fear of the coming VAT hike that's spurning shoppers to make purchase this year before everything becomes 3 percent more expensive. But especially in light of an expected economic slowdown next year -- growth is likely to drop to an anemic 1.2 percent in 2007 -- the government might want to consider taking advantage of the stronger economy to abandon its potentially hazardous tax plans.

In the past, Berlin has pointed to its commitments to have its budget deficit comply with the EU rules for euro-zone countries. But after breaching the 3 percent of GDP limit for the past four years, the six economic institutes now believe Germany's deficit will -- surprisingly -- be just under the limit this year. This gives Berlin more breathing room with their euro-zone taskmasters in Brussels than previously thought.

Break on growth

While the German government's intention to lower its deficit is commendable, regressive tax increases that hit the less well-off proportionally more than the rich is not the way to go about it. Plus, when growth is slowing, adding incentives for people to spend even less isn't a great idea.

In one passage that surely made the Finance Ministry grumpy, the economic institutes in their spring survey wrote: "Higher taxes are the wrong way to consolidate the budget since by experience they hurt growth and employment. Without the VAT increase, growth (in 2007) would…hit between 1.8 and over 2 percent."