By MARCUS WALKER

BERLIN—Germany's government is set to outline billions of euros in budget cuts in coming days to reduce its deficit, despite hopes in the euro zone and the U.S. that Europe's biggest economy will keep the fiscal spigot open to support the region's weak economic recovery.

Chancellor Angela Merkel's ruling center-right coalition is weighing steps ranging from defense cuts to higher tobacco duties to find roughly €10 billion ($12.22 billion) in savings and extra revenue next year—the first step in a multiyear effort to all but eliminate Germany's budget deficit.

Ms. Merkel has warned that nearly all areas of government spending are under review, including tax perks and benefits that Germans have long held dear. Her cabinet is seeking to agree on the list of cuts on Sunday and Monday. "We must make sure we don't constantly live beyond our means," Ms. Merkel said in a recent speech.

Berlin's growing focus on frugality comes as other countries and many economists are calling on Germany to do the opposite: To stimulate domestic demand a little longer, in order to prop up a euro-zone recovery that is in danger of stalling amid a debt crisis on the bloc's Southern fringe, where countries such as Spain, Portugal and Greece are cutting spending under pressure from creditors.

The German government says it has no choice but to trim its deficit, in order to obey the country's so-called debt brake: a constitutional amendment passed last year that requires virtually balanced budgets from 2016. The motivation behind that goal was to prevent rising public debt from undermining the German welfare state as the country's population ages and shrinks.

The government is tight-lipped about where the cuts will fall, with ministries saying decisions haven't been made yet. German media have speculated that measures could include drastic cuts in the German army, new taxes on air travel and nuclear energy, lower housing benefits for the long-term jobless, a new flat-rate levy for public health care, and an end to many tax breaks. Finance Minister Wolfgang Schäuble has said only pensions are safe from cuts, reassuring Germany's powerful and growing lobby of retirees.

The debt brake requires Germany to cut its so-called structural budget deficit (ironing out swings in the economic cycle) to only 0.35% of gross domestic product from 2016 on, compared with about 3% of GDP now. The government says that requires savings of €67 billion from 2011 to 2016, meaning that Germany must shave more than €10 billion from its deficit every year.

The euro-zone debt crisis that began in Greece has raised domestic political pressure on Ms. Merkel to rein in public debt, forcing her coalition to give up its aim of cutting income taxes, a key pledge of its election victory in October. The public mood has turned sharply against tax cuts since then, with Germans widely viewing them as unrealistic. A survey by polling institute Forsa last week showed 76% of voters are now worried that the country's public finances are out of control, up from 62% in February.

Germany's budget deficit, at 3.1% of GDP last year, is one of the lowest in the euro zone. But the shortfall is set to rise to around 5% this year, thanks largely to fiscal-stimulus measures passed after the collapse of Lehman Brothers.The stimulus spending, valued at nearly 2% of GDP this year, means German fiscal policy will still support the economic recovery in coming months, says Eckart Tuchtfeld, an economist at Commerzbank in Frankfurt. But the cuts now being prepared mean German fiscal policy will be less and less supportive from 2011, he says.

Some analysts say the drag will be modest. "Ten billion in savings won't undermine domestic demand" in Germany's €2.4 trillion economy, says Alexander Koch, economist at UniCredit in Munich. German household spending tends to depend mainly on the labor market, which is strengthening slowly, he says. Data released on Tuesday show German unemployment fell to 7.7% of the labor force in May, down from 7.8%.

The worry driving Germany's budget cuts is that even moderate deficits could drive up total public debt, expected to reach about 77% this year, to unsustainable levels in the next decade and beyond, threatening the viability of Germany's cherished pension system and social safety net. Applying the debt brake will eventually reduce public debt to 60% of GDP, in theory the maximum allowed under European Union rules,says Mr. Koch.
—Laura Stevens contributed to this article.

Nice to see a world leader taking debt reduction seriously for a change.

You guys need to remember the EU is one economic zone. Having your government adopt a vastly different spending policy from everyone else will cause problems, exactly like Greece did when they spent way too much. When the German government stops spending, German prices will go down. The lower prices will cause other countries' citizens to spend the money they got from their governments in Germany, preventing prices from falling much. So the Germans will have less money in general but prices won't fall, at the same time the government stimulus programs of the other countries will also fail because all that money will go to Germany instead of propping up the economy in their own countries.

By ANDREA THOMAS in Berlin and TERRENCE ROTH in London

BERLIN — German Chancellor Angela Merkel faces growing discord in her own ranks over her €80 billion ($96 billion) savings plan, which critics say unfairly targets welfare programs.

Members of Ms. Merkel's Christian Democratic Union party Wednesday complained that the cost-cutting program introduced on Monday unfairly targets welfare recipients. Earlier calls for more taxes on high incomes had been blocked by Ms. Merkel's junior government coalition partner, the Free Democrats. Now the divisive split over tax increased will likely dog Ms. Merkel's efforts to get the savings plan through Parliament, which is due to vote on the bill in the autumn.

Economists have lauded the measures as necessary to reduce Germany's soaring budget deficits and set an example for other euro-zone countries even deeper in debt. But they also say more will be needed if the government is to comply with a law requiring a nearly balanced budget by 2016.

Regional Christian Democrats and members of the party's left wing have joined Germany's trade unions and charities in charging that the austerity plan hits lower and middle-income households while sparing the wealthy.

Norbert Lammert, the speaker of Germany's Lower House of Parliament and a member of Ms. Merkel's CDU, said calls for a rise in the top tax rate of 45% would feature highly in parliamentary debates.

"As a signal for the need of a joint effort in our society, I would have wished for a special contribution from the high-income group," Mr. Lammert said in an interview with the Rheinische Post newspaper.

Much of public scorn falls on the Free Democrats, whose low-tax policies favor business interests. The party had to give in on earlier promises of tax cuts, but dug in its heels on proposals for tax increases.

Ms. Merkel's junior partner is taking a drubbing in opinion polls, reaching a new low last week of a 5% approval rating after garnering 14.6% of the vote in last September's general election, according to a poll conducted by the Forsa polling institute for Stern weekly magazine. The Free Democrats have sided with the majority of economists claiming that tax increases would derail Germany's fragile economic recovery. But the politically weakened party is likely to come under growing pressure from the Christian Democrats to agree to tax increases.

"I am very optimistic the Free Democratic Party will be convinced of this in the foreseeable future," Christian Democrat Willi Zylajew said on German television Wednesday.

The brunt of the four-year austerity plan will fall most on social welfare and unemployment benefits, among others, where the government aims to cut €30.3 billion in spending. Companies will carry an extra burden of €19.2 billion through 2014.

A leading German charity group, the Paritätische Wohlfahrtsverband, criticized the government's austerity package as "absolutely unacceptable."

"Top earners and those well off have been almost completely excluded from the savings measures while the unemployed and their families face cuts in irresponsible ways," said the group's managing director Ulrich Schneider. "This package of measures is explosive for the social system. It doesn't create jobs but will intensify the poverty in our country. After billions worth in aid for banks and the car industry, citizens won't accept this injustice."

As part of the measure, family allowance will be reduced for unemployed and low- and medium-income earners and the government will no longer contribute into the public pension plan for the long-term unemployed.

Michael Sommer, chairman of the DGB umbrella trade union threatened with company protests. "Nobody should underestimate our anger about the social unfairness of this policy and our decisiveness to correct this wrong path," Mr. Sommer said. "The first move will be to take this discussion into companies and administration."

Wolfgang Wiegard, a member of the government's council of economic advisors, said that an additional consolidation package of €20 billion will be necessary for 2015 and 2016. "This won't be possible without cutting tax breaks and subsidies," Mr. Wiegard told Handelsblatt newspaper.

calls for a rise in the top tax rate of 45%

Merkel's junior partner is taking a drubbing in opinion polls, reaching a new low last week of a 5% approval rating