Germany's ruling coalition of conservatives (CDU/CSU) and Social Democrats (SPD) said after all-night talks that it had agreed on parts of key reforms to healthcare and corporate taxation.
Kurt Beck, Angela Merkel and Edmund Stoiber (l-r) come up for air after marathon reform talks
According to the deal, healthcare contributions paid by employees and their employers will rise from the beginning of next year by around half a percentage point to help close a massive funding gap, Chancellor Angela Merkel said after a night full of talks from Sunday to Monday.
"This is an important breakthrough we have succeeded in making," Merkel said after the late-night huddle.
From 2008, tax revenues will incrementally be used to fund the system.
Around 1.5 billion in tax revenue will go toward health insurance for children in 2008 and double that amount in 2009.
A central health-care fund will be introduced to pool contributions made by workers and employees as well as the tax money. The fund will pass on money to insurance companies, who -- should they require additional funding -- can also raise cash directly from their members through a levy.
Those covered by public insurers began paying more for prescriptions in 2004
In contrast to earlier plans, private health insurers will not contribute to the fund, although they would have to play a bigger part in "stabilizing the health care system," Chancellor Merkel said.
Reduction of overall tax burden for companies
The coalition also agreed to reduce the overall tax burden on German companies to just under 30 percent from around 39 percent, Bavarian Premier Edmund Stoiber said.
A new flat-rate withholding tax at 25 percent will be levied on capital gains, including interest and dividend income and the gains from asset sales.
The reforms are a key test of Merkel's government as it seeks to overhaul Europe's biggest economy.
The thorniest issue had been the question of how to fund changes to health care, expected to cost at least 16 billion euros ($20.3 billion).
Conservatives are eager to reduce non-wage labor costs while Social Democrats want higher earners to shoulder more of the funding burden.
Merkel said on Monday using tax revenue would lead to a drop in employment costs.
Germany has some of the highest non-wage labor costs in Europe
German workers and employers currently jointly contribute around 14 percent of an employee's wage packet to pay for statutory healthcare, but due to the country's ageing population and low birth rate the system has come under strain as the number of contributors shrinks.
As non-wage employment costs rise to try to compensate, labor becomes too expensive, reducing the incentive for firms to invest in Germany and helping to force companies abroad.
Germany's healthcare system costs around 140 billion euros a year and results in some of the highest non-wage labor costs in Europe.