* Experts say budget plan may violate constitution
* Alternative sought to make room for tax cuts
* Party leaders expect coalition deal by Friday
(adds party leaders saying deal near in paragraphs 3,5,6)
By Erik Kirschbaum and Noah Barkin
BERLIN, Oct 22 (Reuters) - Germany's incoming government has
dropped its controversial plan to plug a hole in state finances
with a "shadow budget" and is considering an alternative that
would push up new borrowing next year, party officials said.
Chancellor Angela Merkel's conservatives and the pro
business Free Democrats (FDP) won a parliamentary majority in
last month's election and forged compromises on a range of
issues, from nuclear energy to foreign policy and healthcare.
Several party leaders said after nine hours of talks on
Thursday they were close to clinching a coalition deal after
weeks of struggle to reconcile their promise of tax cuts with a
separate pledge to bring Germany's budget deficit under control.
Merkel wants to be sworn in next week.
"We'll have a result Friday evening or Saturday morning at
the latest," said Christian Wulff, a leader in her Christian
Democrats, told reporters outside the talks. "There are a few
open issues. It makes sense to take the time to get it right."
Peter Ramsauer, a leader in the CDU's Christian Social Union
sister party added: "We're right on schedule. There's a few
things we're stuck on. But we'll wrap it up by Friday evening."
In talks in recent days, the parties came up with the idea
of using a special fund outside the federal budget to cover
shortfalls of 50 billion euros ($75 billion) or more in
state-run unemployment and health insurance schemes. As part of
this plan, they wanted to pass a supplementary budget for 2009.
But they abandoned the idea after legal experts raised
concerns that the plan, which drew sharp criticism from some
economists and opposition parties, may violate Germany's "Basic
Law", or post-war constitution.
"A supplementary budget for 2009 is off the table," Georg
Fahrenschon, the conservative Finance Minister of Bavaria, told
reporters after a round of coalition talks.
Wulff later defended the supplementary budget idea.
"It's normal to consider different ideas, check them out and
then discard some of them," he said. "I think we're close to an
agreement on the budget. There are three goals we agree on: tax
relief, relieve pressure on budgets and invest in the future."
Under the alternative budget plan, discussed at Thursday's
talks, 20 billion euros would be pumped in to cover the
unemployment and healthcare shortfalls in 2010. The parties had
yet to agree how to cover these shortfalls in subsequent years.
Borrowing would shoot up next year, but would then have to
fall sharply to ensure the new government did not violate new
"debt brake" rules.
Merkel's outgoing "grand coalition" pushed through new
legislation this year capping federal new borrowing at 0.35
percent of gross domestic product from 2016. The law also
obliges the government to reduce borrowing by 0.2 percentage
points annually from 2011 to reach the 2016 goal.
Merkel must find an estimated 50 billion euros in order to
deliver tax cuts expected to total about 20 billion euros.
But she has ruled out raising unemployment and healthcare
contributions, paid by both companies and workers, to plug the
budget hole because this would nullify the impact of tax cuts.
Merkel is also refusing to examine sharp cuts in government
spending, worried that these would hurt her party's chances of
holding on to power in a crucial state election due in May 2010.
(Writing by Noah Barkin and Paul Carrel; Editing by Sonya
Hepinstall and Elizabeth Fullerton)
($1=.6697 Euros)
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