Nov. 2 (Bloomberg) -- Germany's two biggest parties have agreed to raise sales tax by two percentage points to help plug the budget deficit, officials from the Christian Democratic Union and Social Democratic Party said.

Finance experts from chancellor-designate Angela Merkel's Christian Democrats and the Social Democrats of Chancellor Gerhard Schroeder agreed to raise sales tax to 18 percent from 16 percent, officials from both parties said on condition of anonymity.

The Christian Democrats' chief finance negotiator, Hesse Prime Minister Roland Koch, today put the revenue shortfall in the government budget at about 43 billion euros ($54 billion), some 8 billion euros more than previous estimates. The larger-than- expected budget gap has caused the Social Democrats to drop their resistance to the move, officials said.

``What's clear is that the SPD already knew before the election that there's no way around raising sales tax,'' Stefan Mueller, a lawmaker of the Christian Social Union and one of six finance negotiators, said by telephone.

Germany's HDE retail lobby, representing 100,000 stores and chains including KarstadtQuelle AG, have said they reject raising the value-added tax, arguing it will further dent consumer spending at a time when retail sales are expected to drop for a fourth year in 2005.

Job Losses

A 2 percent increase in sales tax may yield the government about 16 billion euros, Dieter Vesper, finance expert at Berlin's DIW economic institute, said in an interview. Raising the levy to 18 percent may cost 314,000 jobs over three years as it drains consumers' spending power, Bernd Meyer, an economics professor at the University of Osnabrueck, told ARD television.

``An increase in sales tax to balance the budget is damaging'' for the economy, said Ralph Bruegelmann, an economist at the business-sponsored, Cologne-based IW institute.

Merkel's election program pledged to use revenues from a higher sales tax to fund a 2 percentage-point reduction in the monthly premiums paid by employers and workers for unemployment insurance, a step welcomed by executives as an incentive to resume hiring.

The Christian Democrat chief and vice-chancellor designate Franz Muentefering from the SPD have pledged to agree a policy program by Nov. 12. Merkel would be elected as chancellor on Nov. 22 if the policy platform is ratified by separate party conferences on Nov. 14.

To contact the reporter on this story: Andreas Cremer in Berlin at acremer@bloomberg.net.

Last Updated: November 2, 2005 12:40 EST