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Chancellor Angela Merkel’s Christian Democrats offered more tax cuts in talks with their prospective coalition partner as they bid to break a deadlock that’s holding up the formation of Germany’s next government.

The Christian Democratic Union raised the amount it’s prepared to spend in tax cuts to 20 billion euros ($30 billion) from an election pledge of 15 billion euros, said Steffen Kampeter, a negotiator for Merkel’s party. At the same time, the CDU insists on efforts to reduce the budget deficit, he said.

“We’ve said there is a medium-term need for budget consolidation of 30 billion euros, plus tax cuts,” Kampeter told reporters in Berlin today before the final meeting of a working group on tax and finances.

The CDU offer came as Merkel began a three-day session of negotiations with the Free Democrats that will attempt to thrash out differences and draw up a platform for the next four years in policy areas from energy to the economy to foreign affairs. Before the talks, the Free Democrats welcomed what they said was “movement” on the tax issue that has stalled an accord so far.

“We’ve always said that we need tax relief for consumers and businesses to generate growth and employment, and it’s good that the union parties now accept this need,” Carl-Ludwig Thiele, a Free Democratic negotiator on the tax panel, told reporters.

Christian Wulff, prime minister of Lower Saxony state and a deputy leader of Merkel’s CDU, said the parties probably still won’t be able to bridge their policy divides this weekend.

Talks Timetable

“We’ll definitely have to continue talks next week with a goal of reaching an agreement by mid-week,” Wulff told reporters as he went into the main negotiating round in Berlin. “We have to put thoroughness ahead of speed, and we want to do well on the details.”

Merkel’s CDU, its CSU Bavarian sister party and the Free Democrats have struggled to agree on the scope for tax relief as government spending to combat the deepest economic crisis since World War II drives debt to a record.

Merkel won a second term on a platform of tax cuts worth 15 billion euros, while Guido Westerwelle steered his Free Democrats to their best-ever result at the Sept. 27 election with a pledge of 35 billion euros in cuts plus an overhaul of the entire tax system.

‘Too Bullish’

“The FDP’s demands are definitely too bullish,” Stefan Bielmeier, an economist with Deutsche Bank in Frankfurt, said by phone. The sums they want are “nearly impossible, given the fiscal situation.” Negotiators may agree on some kind of move toward a simpler tax system that would be “highly welcomed by people and by corporations,” he said.

A revamped income-tax system that slashes the number of tax brackets “requires a lot of preparation,” Georg Fahrenschon, the CSU finance minister of Bavaria state, told reporters. “We can talk about such changes in the longer term.”

An improving outlook for Europe’s biggest economy may help create scope for tax cuts. The government raised its 2010 growth forecast to 1.2 percent from 0.5 percent today, echoing the main economic institutes that released their outlook yesterday.

Still, leeway for tax cuts is “very low,” said Guenther Oettinger, a Christian Democrat who heads the Baden-Wuerttemberg state government. A balanced-budget amendment passed by Merkel’s outgoing government is the “guideline,” he told reporters.

“I’m optimistic that in the coming days we will draw up a coalition agreement for the next four years,” Oettinger said.

In the session’s first accord, negotiators agreed to spend as much as 225 million euros a year to fund a nationwide program of university scholarships, Free Democrat deputy head Andreas Pinkwart told reporters. The aim is to promote excellence and boost the number of students, Education Minister Annette Schavan said. “We agree that there will have to be savings, but not on education,” Pinkwart said.

Merkel has said she wants her new government to be in place by Nov. 9, when world leaders will mark the 20th anniversary of the fall of the Berlin Wall.

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