By Noah Barkin and Michelle Martin
BERLIN (Reuters) - As the rest of Europe struggles with economic weakness, strong wage gains and low unemployment in Germany are fuelling a surge in tax revenues, and a vigorous debate about how to spend the windfall with an election just a year away.
In its monthly report on Friday, the German finance ministry said August tax revenues had surged 12.8 percent compared to the prior year to reach 41.3 billion euros.
While nearly one in four Spaniards and Greeks is out of work, Germany's unemployment rate stands at just 6.8 percent, close to its lowest level since reunification in 1990.
Wages are also on the rise. In May, Germany's largest industrial union IG Metall won a 4.3 percent pay boost for its 3.6 million members, the biggest increase in 20 years. Two months earlier, public sector workers won a 6.3 percent raise over two years.
That has swollen government coffers. Tax revenues have risen 5.8 percent in the year-to-date, ahead of an official forecast for them to increase 4 percent over the full year.
And although German growth is slowing amid weakness in key export markets, Chancellor Angela Merkel's conservatives - with an eye to the election in one year's time - are trying to push through modest tax cuts and discussing new spending on childcare and pensions.
"We are a growth engine and a stability anchor," finance ministry spokesman Martin Kotthaus told a news conference on Friday. "We take these two roles seriously and that is reflected in our budget planning."
The opposition has other ideas. They are blocking government plans for 6 billion euros in tax relief and want the windfall channeled towards debt reduction of the kind Merkel is demanding of stricken southern euro states.
"It is irresponsible to take on new debt at a time of record tax inflows," said Carsten Schneider, budget expert for the opposition Social Democrats (SPD) in parliament.
So far the government is planning net new borrowing of 32.1 billion euros this year and 18.8 billion next year. It wants to close the budget hole completely by 2016.
"We need to consolidate our budget. That is the priority - not offering new tax cuts," said Schneider's SPD colleague Kurt Beck, premier of the western state of Rhineland Palatinate.
In its monthly report, the finance ministry said the trend in tax revenues was likely to weaken in the second half of the year, citing leading economic indicators.
German business sentiment dropped in August but is expected to remain fairly steady this month. A survey released on Thursday showed the private sector shrinking for a fifth straight month.
The German economy put in a solid performance in the first three months of the year, expanding by 0.5 percent, but growth slowed to 0.3 percent in the second quarter as companies concerned about the euro zone crisis cut back on investments.
The ministry said exports, which have traditionally been the main pillar of support for the German economy, were likely to weaken in the remainder of the year.
It said private consumption could continue to prop up growth in the second half of 2012 thanks to higher wages and the stable labor market.
(Additional reporting by Matthias Sobolewski)