Santa Claus has come early to Germany this year -- with the gift of an unexpected tax windfall. In a country used to bracing itself for the latest set of depressing economic figures, a whiff of optimism is in the air. With an ongoing economic upswing and a drop in unemployment, the tax base in Germany is slowly expanding. That means the government is taking in more taxes than it had predicted. But now comes the hard part -- what to do with the money.

With Germany's tax assessors due to announce that the treasury can expect a giant tax bonus for 2006 and 2007, Berlin is faced with a dilemma: Should it give the recovering economy a cash injection, or cut labor costs or universal health care contributions? It could also halt a planned hike in value-added tax (VAT or sales tax) or be economically prudent and use the unexpected bonus to balance the books.

Each year this tax projection forms the basis for the financial planning of federal and state budgets. The tax income for 2006 could be between €15 billion and €35 billion more than was estimated in May, the Associated Press is reporting. According to the newspaper Bild, the federal and regional combined tax bonus will be €23 billion for 2006 and €19 billion in 2007. Around half of this will go directly to the federal Finance Ministry and the rest will be funneled to regional governments.

While Chancellor Angela Merkel and other conservatives have indicated that they would like to see the money used to reduce payroll costs, such as health insurance contributions, their coalition partners the Social Democrats (SPD) want to take advantage of the bonanza to chip a bit off the public deficit. Meanwhile, the business-friendly Free Democratic Party (FDP) would like to see the scrapping of a planned three-percent VAT increase.

Germany has been in the economic doldrums for some time, but things seem to be looking up. The budget situation is looking rosier and the unemployment rate is falling. For the first time in almost four years, less than 10 percent of the workforce is unemployed. This in turn should help to reduce the state's welfare burden and increase tax contributions.

German editorial pages on Thursday take the windfall as an opportunity to ask critical questions of the government: Can the politicians take advantage of this economic boost to provide long-term economic growth, employment and stability?

The conservative daily Die Welt writes that the coalition is debating a "luxury problem," what to do with the extra income. While financial experts want to reduce debt, the health experts want to use the opportunity to block the likely increase in health insurance contributions, and the economic experts want to further reduce employer's labor costs. "But the cash windfall is not enough to fulfil all these wishes." The paper supports Finance Minister Peter Steinbruck's position that the extra money cannot solve structural problems and it advises economic prudence. "The impression that the finance minister is swimming in money is false. The government is still spending much more than it is earning. And as long as the coalition doesn't drastically reduce its spending, that's not going to change."

The financial daily Handelsblatt warns that, "The budgetary crisis at the federal and regional level since the failed financing of reunification is much more than a passing phase." The paper doesn't think this windfall will be enough to prevent the country from going further into debt. It argues that even under good economic conditions every German finance minister is required to balance spending and saving. "One of the reasons for the failure of the Schröder government was that it didn’t save enough following the 1999/2000 boom to be able to sit out the long recession that began in 2001." The paper sounds a final word of caution: "In good times the attempts to save on the part of the state do not dampen growth. In bad times, that is different. So now is the time to save."

The mass circulation daily Bild notes that everyone has had the same problem: "Whether it's preferable to save or to spend?" The paper has the perfect solution -- the finance minister could solve the problem by spending in order to save. The paper predicts that the planned increase in VAT could dampen the current flourishing economic situation -- "that would cost thousands of jobs." The paper argues that the costs of labor, therefore, have to be reduced. "The government should immediately invest in better conditions for new jobs and thus in the next upturn." With more workers and fewer people on welfare, the treasury would earn more and spend less, the paper concludes, thus reducing the debt further.

The Frankfurter Rundschau, which is owned by the Social Democrats, echoes this argument. The paper writes that the reduction in public debt remains an important concern. "But the list of priorities can no longer be reduced to this point alone." Tax payers should also profit from the positive economic development. That would help to create jobs and to reduce the impact of the VAT hike. "It would be in the finance minister's own interests to share the income from the upturn with employers and employees." Because if the job market recovers, the debt burden will be reduced more quickly and more sustainably than it would be through excessive and narrow savings measures.

The Financial Times Deutschland points out that the government still has the chance to really take its motto "improve, reform, invest" seriously. However, in the current debate about what to do with the extra money, the paper points out that there has been hardly any mention of the third part of this motto "investment." The paper argues that "it would make sense to increase the government's investment by €2-€3 billion," and it should put money into infrastructure and research. It argues that investment has helped to create the current favorable conditions. The government isn’t responsible for everything, the paper writes, "but the impulse from above does affect the climate in the country." It would be a great achievement if the terms "reform and tightening of belts" were to be replaced with new vocabulary like "growth, promotion, building, founding and boosting."