FACTBOX-German parties negotiate coalition policies

Merkel and other party leaders will hold negotiations this weekend to agree a policy blueprint that will allow a new centre-right coalition government to take power.

Below is a rundown of progress in key policy areas:

TAXES

* The parties agree they will cut tax but are at odds on the amount and timing due to the strained state of public finances.

* Merkel's conservatives campaigned on a promise of cuts worth 15 billion euros ($22.38 billion) but were vague on when to implement them. The FDP promised swift tax cuts worth up to 35 billion euros. The talks are now focusing on a conservative proposal of 20 billion euros in cuts over the four-year term.

* The FDP is expected to win an agreement on simplifying tax brackets and limiting cold progression. This is when the brackets are not raised in line with inflation so that workers can move into higher tax bands even if their real income has not grown. However, this looks likely to be phased in gradually rather than pushed through in one big bang reform.

BUDGET DEFICIT

* Cutting a bulging deficit will be crucial for the next government and the parties are still discussing how to do this. Merkel has said she will not pursue aggressive spending cuts and has ruled out raising value-added tax on goods and services. The FDP argues lower taxes will boost economic growth and help to reduce the deficit.

* The new coalition has agreed to look at selling some state holdings in companies which could help to plug the deficit. The most likely sales are stakes the government took in banks during the financial crisis and also in rail operator Deutsche Bahn.

* The parties have said cuts in military projects such as the A400M and Eurofighter are unlikely although the FDP may push for cuts to the A400M order if delays to the project continue.

* The parties are at loggerheads over financing Germany's health fund which needs a 7.5 billion euro injection. The FDP also wants a wholesale rethink of the fund, a taboo for Merkel, whose outgoing government set up the system.

FINANCIAL MARKET SUPERVISION

* Parties have agreed German banks will have to meet tougher capital requirements and that supervisory powers for financial markets, until now split between Germany's Bundesbank and watchdog Bafin, will be concentrated at the central bank.

* The new coalition will take steps to boost the private equity sector and help Real Estate Investment Trusts (REITs) by completely opening REITs to residential property. These steps, demanded by the FDP, will not take effect until at least 2011.

LABOUR MARKET

* The new coalition will keep minimum wages already agreed for certain sectors and seek to protect workers from immoral wages by banning salaries a third below the sector average.

* The FDP wants to make it easier for firms to hire and fire but has shown signs of compromise after conservative opposition. Merkel has ruled out FDP plans to reform co-determination rules giving workers a seat on company boards.

ENERGY

* The parties have agreed to look at extending the lives of at least some of the safest of Germany's 17 nuclear plants. But they are expected to impose strict conditions. Power firms will have to make concessions for longer plant operations.

* The parties will review financial support for renewable energy. An environmental working group paper has recommended cuts in support for only a small portion of photovoltaic systems, which turn sunlight into power, from 2010 and an overhaul of Germany's Renewable Energy Act by January 2011.

FOREIGN/DEFENCE

* The parties have agreed not to rule out Turkish membership of the EU although the conservatives oppose the bid, preferring a privileged partnership that stops short of full membership.

* There is broad agreement on most foreign issues, such as Afghanistan and Iran but the FDP is resisting conservative plans to let the army be deployed within Germany after accidents or natural disasters.

* The conservatives oppose FDP plans for a quick removal of the remaining U.S. nuclear warheads stationed in Germany, preferring a negotiated solution with Washington.

INTERIOR

* The coalition has agreed steps to clamp down on youth crime and bring in rules to let judges send juveniles to prison for short stints.

* The parties will keep recently introduced legislation allowing online surveillance but the FDP have won a commitment to bring in tighter rules on its use to protect privacy.