FACTBOX-German parties negotiate coalition policies

BERLIN Oct 11 (Reuters) - German coalition talks between Chancellor Angela Merkel's conservatives and the Free Democrats (FDP) enter a crucial stage this week with working groups aiming to forge agreements on a full range of policy issues:

TAXES

The differences:

- The conservatives campaigned on a pledge of tax cuts worth 15 billion euros ($22 billion). Merkel's Christian Democrats (CDU) refused to put a timeline on the cuts but their Bavarian sister party, the Christian Social Union (CSU), advocated relief starting in 2011.

- The FDP promised tax cuts worth up to 35 billion euros and want to implement them soon.

What the parties say:

- Merkel says she is committed to cutting taxes and wants to do so in two steps, starting in 2011 at the earliest. However, some senior conservatives, including Hesse premier Roland Koch, say cuts beyond the 15 billion euros pushed by the CDU are out of the question given the high deficit.

- The FDP insists tax cuts are possible and has raised the idea of linking them to spending cuts. Senior FDP politician Hermann Otto Solms, a candidate for finance minister, says the party "cannot chicken out" of its campaign pledge.

The compromise:

- Coalition sources say the parties are looking at a two- or three-step tax cut, from 2011. They could lock in a minimum level of tax relief for the full legislative period, while tying additional cuts to progress in reducing the deficit. Some factions want to skew the cuts toward the start of the four-year legislative period, others want the bulk towards the end.

DEFICIT

The differences:

- The conservatives want to reduce the deficit but are less willing to cut spending and also more cautious about tax cuts.

- The FDP is looking at spending cuts to rein in the budget deficit, expected to be twice the European Union limit in 2010.

What the parties say:

- The FDP wants to reduce state subsidies and end the "waste" of taxpayers' money. Some in the party talk about making savings on military projects, possibly on the third tranche of Eurofighter or on the A400M military transporter.

- Merkel rejects wholesale spending cuts. Some in her party have mooted raising sales tax towards the end of the legislative period if the economy is buoyant but Merkel dismissed this idea. Plans to raise child support funding and tax breaks for families have been shelved due to the deficit, German media reported.

The compromise:

* A solution will depend on the tax policy compromise. The parties could cut back on some military projects but are likely to avoid tough austerity measures. A privatisation of Deutsche Bahn, the railway, could come back on the agenda soon.

LABOUR MARKET

The differences:

- Merkel wants to retain the minimum wages the outgoing government agreed for some sectors, and oppose labour market reforms that would make it easier for firms to hire and fire.

- The FDP wants to loosen job protection rules for workers, rein in minimum wages and overhaul "co-determination" rules which give workers seats on company boards.

What the parties say:

- Ronald Pofalla, a close Merkel ally, has ruled out any changes to dismissal protection laws or minimum wages.

- The FDP wants to change the job protection rules, though one senior party official has said this is not a top priority.

* The compromise

The FDP has signalled a readiness to compromise on this issue. Senior conservatives are resisting change and the prospects for immediate, wholesale reform look slim.

ENERGY

The differences:

- Both parties have said they will look to extend the lives of Germany's 17 nuclear plants. But Merkel wants to postpone any decision until after a state election in North Rhine-Westphalia, Germany's most populous state, in May 2010 and has agreed that stance with FDP leader Guido Westerwelle, sources told Reuters.

Differences centre on the profits power companies generate from the extension, with conservatives wanting to direct more towards keeping down electricity prices. Both parties also want to use some profits to invest in renewable energy.

- The FDP is keener than the conservatives to reduce high state-mandated feed-in tariffs for renewable energy.

What the parties say:

- Merkel has said she will look at how to implement an extension of the nuclear plants' lives.

- FDP Deputy Chairman Andreas Pinkwart says there might not be a blanket extension of the plants' lives and the government could drop the extension plans if power companies take issue with the conditions. The FDP is pushing for the state to take "a more measured approach" in its support for photovoltaic energy.

The compromise

* The parties will stress the safety of nuclear plants is of paramount importance and may not extend the lives of them all. Power companies will likely have to make concessions in exchange for longer plant life cycles. (Writing by Paul Carrel and Erik Kirschbaum)