Oct. 22 (Bloomberg) -- Christian Social Union party leader Horst Seehofer, one of three top negotiators for the next German government, said the coalition wants to create a special debt fund to pay for rising unemployment and health insurance costs.

“There have been special funds before in Germany on singular historic occasions,” Seehofer said in Berlin yesterday after eight hours of negotiations. “At the moment we have special funds for medium-sized companies and corporations and a special fund for banks. Now we’re going to create a special fund for workers.” He didn’t comment on the likely size of the fund.

Business lobbies and economists say a special fund outside the budget would cloak the true state of Germany’s public finances and may undermine a debt brake put in place this year that aims to keep future liabilities under control.

The decision highlights the difficulties Chancellor Angela Merkel faces as she seeks to reconcile the goals of tax relief and budget consolidation. The Free Democratic Party, one of the three prospective parties in government, called for 35 billion euros ($52.5 billion) in tax cuts in its election campaign while Merkel’s Christian Democratic Union and its Bavarian CSU sister party offered 20 billion euros in negotiations last week.

Financing outlays for unemployment and health insurance through a special fund “is nothing more than an accounting trick,” Patrick Adenauer, head of the ASU lobby of family-owned businesses, said yesterday in an e-mailed statement.

Structural Deficit

Adenauer said Merkel’s prospective coalition lacks the strength to tackle the so-called structural deficit, the budget shortfall that has to be covered by new borrowing even in times of average tax revenue. Merkel “neglects spending cuts because it’s more comfortable to raise debt,” he said.

A special fund of 60 billion euros would swell Germany’s budget deficit to around 90 billion euros this year via a third supplementary budget, Stefan Bielmeier, an economist at Deutsche Bank AG, said in an e-mailed statement.

In January, Merkel’s government opened a supplementary budget as the economy slid into its fourth quarter of contraction. The fiscal step pushed up planned federal bond sales to a new record of 346 billion euros.

Bond Sales

As banks sought less financial aid than anticipated, the Frankfurt-based Federal Finance Agency was authorized last month to cut total annual bond sales to 329 billion euros, still an all-time high.

Merkel won’t be able to reverse the planned cuts without opening a third supplementary spending plan. She would be obliged by constitutional law to seek the approval of lawmakers and write the new outlays in a supplement to the current budget.

Deutsche Bank Chief Economist Norbert Walter said all government spending should come out of one budget. He said the plan violates basic accounting principles and is similar to the off balance sheet vehicles created by banks that contributed to the financial crisis, the Handelsblatt newspaper reported.

“The special fund is part of the budget and will be published in a transparent matter, and of course it has to be repaid,” Seehofer said.

Tax cuts and health spending have emerged as sticking points in discussions on an agreement, which politicians from all three parties plan to wrap up this week to elect the new government in Germany’s lower house of parliament, or Bundestag, next week.

To contact the reporters on this story: Rainer Buergin in Berlin at rbuergin1@bloomberg.net; Brian Parkin in Berlin at bparkin@bloomberg.net.

Last Updated: October 22, 2009 07:55 EDT