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German Finance Minister Wolfgang Schaeuble speaks during a meeting at the lower house of parliament Bundestag on 2017 budget in Berlin, Germany, September 6, 2016. REUTERS/Stefanie Loos

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By Michelle Martin and Madeline Chambers

BERLIN (Reuters) - Germany has scope to cut taxes by around 15 billion euros after the federal election in September 2017 despite increased spending on migrants, Finance Minister Wolfgang Schaeuble said on Tuesday.

Campaigning is getting underway for next year's vote and Chancellor Angela Merkel's Christian Democrats (CDU), of which Schaeuble is a member, face a tough challenge after their open-door refugee policy alienated some traditional supporters.

The anti-immigrant Alternative for Germany (AfD) beat the CDU into third place in an election in Merkel's home region on Sunday, an embarrassing defeat that she has conceded was due to her party's pro-refugee stance.

Speaking to the Bundestag lower house of parliament, Schaeuble stressed that employment, wages and taxes were increasing in Germany while tax revenues were rising, the economy was growing and the budget was balanced.

The Munich-based Ifo economic institute said earlier that Germany's current account surplus would probably hit a new record of 278 billion euros ($310 billion) this year, overtaking that of China again to become the world's largest.

Schaeuble said that, while Germany would need to invest in integrating the hundreds of thousands of migrants who arrived here last year and also into domestic security - at a time when a series of attacks on civilians have left Germans on edge - there would be room for manoeuvre on taxes.

"After 2017, in the next legislative period, we'll have room to cut taxes by around 15 billion euros," he said, adding that they should be targeted at people on low to medium incomes.

COALITION PARTNER PREFERS STATE SPENDING

But Economy Minister Sigmar Gabriel, the leader of the Social Democrat (SPD) junior coalition partners, spoke out on Tuesday evening against Schaeuble's tax-cutting plans.

"That's a story he's spreading that's life-threatening for a democracy," Gabriel said, adding the SPD would fight against such cuts. He said Germans expect the government to first raise spending on schools, pensions, police and health care.

Merkel has said that Germans would get tax relief in the next legislative period.

Some Germans, particularly in poorer eastern regions, are angry that the government is spending vast sums on migrants. Data published on Monday showed state spending on benefits for migrants climbed by around 120 percent in 2015 to almost 5.3 billion euros.

Schaeuble also said he would seek to correct "cold progression" or bracket creep in the tax system, from Jan 1, 2017. Thresholds in Germany's progressive tax system are not automatically adjusted for inflation so if someone gets a pay rise, they can find they end up with a net pay cut.

Schaeuble said he would aim to reduce the burden caused by "cold progression" by around two billion euros.

($1 = 0.8957 euros)

(Editing by Gareth Jones)

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