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BERLIN (Reuters) - Germany should use its rising tax revenues to invest in infrastructure projects that will enhance its growth potential, and encourage employers to raise wages to help lift euro zone inflation, the International Monetary Fund said on Monday.
The IMF recommendations run counter to the thinking of Finance Minister Wolfgang Schaeuble, who last Thursday announced higher tax revenue estimates for this year and rejected criticism that Germany was not investing enough.
In a report following its annual 'Article IV' meetings with the German authorities, the IMF said Germany's large and persistent current account surplus reflected high domestic savings and better investment opportunities abroad.
"Germany should embrace a set of coordinated fiscal and structural policies to safeguard its strengths and address remaining challenges, including reducing external imbalances," the IMF added.
An IMF official told a news conference the Fund saw Germany's current account surplus falling to 7.5 percent of national output by 2022 from 8.3 percent last year, adding that a surplus of between 2.5 and 5 percent would be appropriate.
Germany's current account surplus has been a source of discord for years with the United States, the IMF and some euro zone peers, which have urged it to do more to boost lacklustre domestic demand.
Germany has pushed back, arguing that it is increasing investment and that the surplus is partly due to the attractiveness of German products, for which the country should not be punished.
In its report, the IMF said the German economy was performing well but that business investment lacked momentum and the population's ageing population weighed on its long-term growth prospects.
"The available fiscal space should be used for initiatives that enhance the growth potential, such as investment in physical and digital infrastructure, child care, refugee integration, and relief of the tax burden on labor," it said.
The IMF also recommended pension reforms to make it more attractive to work longer.
Looking at the broader euro zone, the Fund said a sustained rise in wage and price inflation in Germany was needed to help lift inflation in the single currency bloc and aid the normalisation of monetary policy.
Schaeuble often says he wishes the European Central Bank would start unwinding its expansive policy.
The IMF added: "...the authorities could usefully emphasize in their public communication the importance of robust wage and price growth in the current conjuncture, while respecting the autonomy of the social partners in wage setting."
Reporting by Paul Carrel and Gernot Heller; Editing by Gareth Jones