New coalition government begins with agreement on crucial fiscal scheme

REUTERS - German Chancellor Angela Merkel’s conservatives sealed a coalition deal with the Free Democrats (FDP) on Saturday after marathon talks and said they will press ahead with 24 billion euros in tax cuts despite a yawning deficit.

The agreement, reached shortly after 2 a.m. (0000 GMT), paves the way for a new centre-right government to take office next week, roughly a month after Merkel’s conservatives and the FDP won a parliamentary majority in a federal election.

“The coalition agreement has been reached,” said Ronald Pofalla, general secretary of Merkel’s Christian Democrats (CDU), who is set to become her chief of staff in a new cabinet which was agreed late on Friday.

To spur growth the government will pursue income tax relief valued at 24 billion euros ($36 billion) starting in 2011, with low and middle income households and families with children benefiting.

Tweaks will also be made to corporate and inheritance taxes in what the 128-page coalition agreement describes as a comprehensive package to boost growth as Germany emerges from its worst recession in the post-war era.

“I’m very pleased with this result,” said Horst Seehofer, head of the Bavarian Christian Social Union (CSU), sister party ot Merkel’s CDU. “We’ve come up with a reasonable result for the next four years and the coalition has set up a good platform for the upturn in Germany.”

The talks dragged on as the incoming government struggled to reconcile their promise of billions of euros in tax cuts with a separate pledge to get Germany’s deficit, swelled by massive stimulus packages, back under control.

By Friday they had already forged compromises on a range of other issues, from healthcare to nuclear energy and foreign policy, where the differences between them were comparatively minimal.

Cabinet Posts

The parties also divided up cabinet posts, tapping Wolfgang Schaeuble, a veteran from Merkel’s CDU, for the finance ministry and FDP leader Guido Westerwelle as foreign minister.

Schaeuble, 67, a former protege of Helmut Kohl who has earned a reputation as a hardliner on domestic security issues as Merkel’s interior minister for the past four years, was a surprise choice as finance minister.

Before the election, he indirectly criticised Merkel’s pledge to pursue billions of euros in tax cuts, saying there was little room for them given Germany’s strained finances.

Now he will be charged with implementing those cuts against the backdrop of a deficit that is poised to rise to double European Union limits next year.

In a wheelchair since he was shot and nearly killed by a mentally ill man in 1990, Schaeuble is likely to be a force within the cabinet, even if it means confronting Merkel.

“He’s going to be a tough nut to crack especially for Merkel, » said one source involved in the month-long coalition talks. « There’s a lot of conflict potential. »

Other cabinet members include deputy FDP leader Rainer Bruederle, 64, who is slated to become economy minister. He will take the place of Karl-Theodor zu Guttenberg, the 37-year old rising star from Bavaria, who gets the defence portfolio and will have to explain Germany’s military presence in Afghanistan to a sceptical public.

Guttenberg will no longer be the youngest minister in Merkel’s cabinet. That honour goes to Philipp Roesler, 36, who was born in Vietnam and becomes Germany’s first Asian-born cabinet member as health minister.