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By Erik Kirschbaum
BERLIN (Reuters) - Chancellor Angela Merkel's conservatives and their Free Democrat allies have shelved plans to lift family spending due to budget constraints but will lower some tax rates to boost growth, a magazine reported on Saturday.
Focus magazine reported that leaders in the two parties that are in talks to form a new centre-right government after winning last month's election decided to put off proposed increases in monthly child support and tax breaks for families with children.
Georg Fahrenschon, Bavaria's state finance minister, told Focus the new government would have to reduce spending by 30 billion euros over the next four years. It wants to reform corporate taxes that are worsening the economic crisis.
"The only new spending we can afford is for measures that stimulate growth," Fahrenschon said.
The new government would instead look to make good on its election promise to reduce "cold progression" -- where workers' income tax brackets rise with pay increases. The "bracket creep" means the state will take in an extra 22 billion euros in 2010.
Merkel's Christian Democrats and the Free Democrats had floated plans to raise child-support payments to 200 euros a month from 154 euros now and lift the tax exemption for dependent children to 8,004 euros from 6,024 euros annually.
But that would cost the government about 10 billion euros per year. Due to the government's difficult financial situation, the party leaders in coalition talks decided they would instead concentrate on reducing taxes for middle-class wage earners.
Merkel's conservatives and the FDP won last month's election and want to complete negotiations this month for the first centre-right government since 1998. Merkel has been chancellor since 2005 in a grand coalition with the Social Democrats.
The budget situation might be brighter than expected, according to a report in the Wirtschafswoche magazine on Saturday. It said new federal borrowing this year might be about 40 billion euros instead of the 47 billion previously expected.
The Finance Ministry attributed the improved situation to a positive development with tax revenues, lower interest rates and the fact that unemployment has not risen as high as expected.
(Writing by Erik Kirschbaum; editing by Andy Bruce)

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