German Chancellor Angela Merkel's coalition met on Monday to agree the framework for a new stimulus package that could inject up to 50 billion euros into an economy facing its worst recession since World War Two.
The three ruling parties have agreed to spend billions of euros in federal funds on infrastructure projects to save jobs, but are at loggerheads over other details, including whether to include tax relief in their second stimulus package in as many months.
The political stakes are high ahead of a federal election in September in which Merkel, leading the Christian Democrats, will face off against Foreign Minister Frank-Walter Steinmeier, her coalition partner and Social Democrat (SPD) leader.
Before the parties began the talks at the Chancellery at 2 p.m. (1300 GMT), a leading member of Merkel's conservatives said they would push for a package totalling 50 billion euros ($69.63 billion) over the next two years, at the higher end of previous estimates.
"That's a considerable impulse," Volker Kauder, parliamentary leader of Merkel's CDU, told ARD public television.
The SPD has said it favours a programme worth about 40 billion euros over two years.
Dirk Schumacher, senior European economist at Goldman Sachs, said the key outstanding questions remained the size and timing of the package.
"Public investments usually take at least six months to be implemented while measures that boost disposable income for private households can affect aggregate demand almost instantaneously," he wrote in a research note.
Merkel's spokesman, Ulrich Wilhelm, told a regular government news conference that no firm decisions would be made at Monday's meeting, which would prepare the ground for a deal on Jan. 12.
Merkel's government pushed through a 31 billion euro package late last year but critics have dismissed it as too small.
Only about a third of the sum comes from new spending, and some economists say this was not enough to help the huge German economy, which entered recession in the third quarter of 2008 and may suffer its worst contraction since World War Two this year.
The coalition parties agree the government should boost spending on infrastructure projects and schools, but disagree on issues such as tax cuts.
"It will be very difficult to get a common denominator on tax," SPD deputy leader Andreas Nahles told German radio.
Late on Sunday, Merkel bowed to pressure from the CSU, her conservative allies from the southern state of Bavaria who insisted that tax relief be included in the package.
The two conservative parties agreed to propose lifting the tax-free salary allowance to 8,000 euros from 7,664 euros and overhaul a system whereby taxpayers are automatically bumped up into higher tax brackets even if real incomes have not grown.
The SPD supports cuts in health insurance fees and higher child benefits and wants incentives for people to get rid of old, fuel-guzzling cars. Instead of cutting taxes, it wants to raise the top income tax rate to help pay for its plan.