BERLIN, June 4 (Reuters) - German Chancellor Angela Merkel meets cabinet ministers on Sunday and Monday to take tough decisions on spending cuts and/or tax rises next year to consolidate the budget deficit in Europe's biggest economy.
Although Germany's public deficit is likely to be significantly lower than levels in some other euro zone states this year, it is still expected to exceed 5 percent of gross domestic product, breaching the EU's three percent cap.
The government also has for the first time to take into account a new "debt brake" rule which requires the government to reduce the debt-to-GDP ratio and cut the structural deficit by roughly 10 billion euros, experts say.
However, Finance Minister Wolfgang Schaeuble has said the government faces less of a challenge than previously anticipated to consolidate its finances this year and in the mid-term.
The ministry expects federal net new borrowing to total some 70 billion euros this year, roughly 10 billion below its previous forecast, officials in the ruling coalition say.
Here are some of the options which ministers will haggle over at the weekend:
SALES TAX RISE
* Some experts have suggested raising sales tax to 25 percent from 19 percent, saying that could generate more than 50 billion euros.
Another option is to increase sales tax to the full rate of 19 percent on some items that benefit from a lower rate of 7 percent.
Likelihood: A blanket rise seems highly unlikely, not least because it would be politically difficult on top of a 3 percentage point increase in 2007. That was the biggest tax rise in post-war Germany. In addition, the move could fuel criticism from other euro zone states that Germany should do more to boost domestic demand.
OTHER TAX RISES
* The government is considering raising tax on tobacco, say sources, which would generate several hundred million euros.
* The government may also extend a highway toll for trucks which would bring in hundreds of millions of euros.
* The environment ministry has said it is considering a new tax on the burning of nuclear fuel rods which would be linked to companies benefiting from a planned extension of the lives of some nuclear plants. It is unclear how much this could raise.
* Media have speculated about talk of a possible special tax on flights.
Likelihood: At least some of these measures look likely
OTHER REVENUE-BOOSTING MEASURES
* The government may park the proceeds from its sale of UMTS telecoms licences into the 2011 budget. That could boost revenues by some 4 billion euros.
Likelihood: This one-off trick seems a likely option.
SPENDING CUTS/BENEFIT CURBS
* Ministers will be urged to swallow spending cuts and budget discipline in 2011 but a few areas are sacred.
Media have reported that Merkel does not want to make major cuts in pensions or unemployment benefits.
However, cuts in parental benefits for the long-term unemployed are possible. This could result in savings of about 400 million euros.
Merkel, who has a long-term policy of lifting spending on education to 10 percent of GDP, is also loathe to make major cuts to the education budget.
Transport is an obvious target for cuts but Transport Minister Peter Ramsauer has put up stiff resistance so far.
Likelihood: Big cuts to pensions, unemployment benefit and education look unlikely but smaller adjustments are expected.
DEFENCE
* Germany's armed forces could be reduced in size by up to 40 percent, German media have reported. One newspaper has said the size of Germany's Bundeswehr army could be cut to 150,000, around 100,000 less than the present total. That would yield savings of about 400 million euros a year. Another paper said the reduction could be around 50,000.
Abolishing Germany's compulsory military service is also under discussion but Merkel seems to have ruled out that option, partly because the resulting savings would not make such a controversial move worthwhile.
Likelihood: Army cuts are likely, military service to stay.
(Compiled by Madeline Chambers; Editing by Ron Askew)