The German Cabinet has approved a cocktail of spending cuts and tax rises, easing concerns in Brussels over state finances, but risking a further slide in public approval ratings.

The Cabinet backed measures that will introduce a capital gains tax of 15% on profits from personal share and property investment, raise levies on heating oil, and cut a subsidy for Germans building their own homes.

The tax rises are going to drive medium sized business into bankruptcy

Ludwig Georg Braun, chamber of commerce and industry

The package, which will be backed by a further 32.4bn euros in government borrowing in 2002 and 2003, is aimed at balancing the books as the continuing economic downturn hits tax revenues.

The level of the budget deficit, set to touch 3.8% of Germany's economic output this year, has earned the country condemnation by the European Commission.

Rules designed to protect the strength of the euro limit eurozone states to a budget deficit equivalent to 3.0% of economic output, and German Finance Minister Hans Eichel said that Wednesday's agreement could see the country again meet the guidelines.

"If all is being implemented...then we will be below the 3% level next year, although it will not be an easy path," Mr Eichel said.

Tax rises 'fatal'

But the tax rises risk stoking unrest among voters over Chancellor Gerhard Schroeder's administration which, since it was elected in September, has seen its popularity plunge.

Chancellor, we've had enough!

Bild newspaper

A protest by builders against the homebuilding subsidy saw a convoy of more than 200 trucks loaded with building stones drive across Berlin, honking their horns at the Brandenburg Gate.

Bild, Germany's top-selling newspaper, ran with the front-page headline: "Chancellor, we've had enough!"

And Ludwig Georg Braun, president of Germany's chamber of industry and commerce, the DIHK, warned that the budget was a recipe for bankruptcies.

"In a period of economic stagnation tax hikes are fatal," Mr Braun said.

"[The tax rises] are going to drive medium-sized business into bankruptcy, and be poison for the labour market."

'Dreadful' economic environment

The ZDH skilled workers' association, which represents craftsmen such as carpenters and plumbers, on Wednesday estimated that its sectors would shed 300,00 jobs this year, and 100,000-300,000 next year, as the economic slowdown continues.

And further concerns over the health of German companies were raised by a report by news agency Reuters, which said that half of recent results reported by large German firms have come in below analysts' forecasts.

Only six firms beat estimates.

"Clearly it is a reflection of the [economic] environment in Germany, which is dreadful," Gareth Evans, European equities strategist at ING Barings in London, said.