The legislation proposed by Angela Merkel, the chancellor, promise net annual budget savings of 800 million euros in 2006, rising to seven billion euros by 2010.

The upper house of the German parliament, the Bundesrat, gave an easy passage to all the proposals on Wednesday, including the main step to end tax subsidies to first-time home buyers.

The Eigenheimzulagen benefit to first-time home buyers was one of the government's most expensive tax subsidies, usually exceeding 20,000 euros spread out over eight years.

The Bundesrat repeatedly blocked efforts by the previous chancellor, Gehard Schroeder, to reform the system.

Gridlock over the issue helped trigger an early election triggered which resulted in the Social Democrat Party (SPD) teaming up with Merkel's Christian Democrats in a coalition government which has an overwhelming majority in both houses of parliament.

Political wrangling

The scrapping of the benefit will lead to savings of six billion euros per year by the time the current payments scheme gradually runs out over the next eight years.

The Bundesrat also approved legislation allowing unemployed people over 58 to keep jobless benefits, even if they turn down job offers with wages lower than their last job.

Younger workers who refuse jobs now face sanctions.

Other tax changes that passed included a controversial measure to eliminate tax breaks for the costs of tax advisers.

Tough measures

Several states criticised the change, saying it would hurt middle and low income wage earners, but still voted for it.

Germany's budget deficit is expected to exceed the EU's three percent of gross domestic product limit in 2006 for a fifth year in a row and the government has committed itself to getting back in line by the end of 2007 at the latest.

 

Neither the centre-left SPD-Greens coalition nor the conservative CDU-Free Democrats alliance of opposition parties on the other side won a clear majority in September's election, forcing the two main parties to form a grand coalition.