Oct. 26 (Bloomberg) -- Chancellor Angela Merkel said that spending is necessary to pull Germany out of its worst recession in modern history, justifying her government’s focus on tax cuts to generate economic growth.

Merkel, in a speech to a convention of her Christian Democratic Union in Berlin today, stood by tax cuts worth 24 billions euros ($36 billion), more than the 15 billion euros she had pledged before the Sept. 27 elections. Delegates approved the coalition’s policy platform for the next four years, after the Free Democrats backed the program yesterday. The Christian Social Union, Merkel’s Bavarian ally, approved it at a meeting in Munich, Deutsche Presse-Agentur reported.

With the coalition contract, “we’ve decided to go down a road that relies fully on growth,” Merkel said. “There’s no guarantee that it’s going to work, but it has a chance. I don’t see any chance that we’ll succeed if all we do is save, save, save.”

Under the coalition agreement, Merkel keeps control of the coffers away from the Free Democrats, who advocated more aggressive tax cuts than the chancellor. The negotiations, conducted over three weeks, were dominated by attempts to balance government spending with debt that’s set to soar to a post-World War II record.

Wolfgang Schaeuble, the finance minister-designate, said yesterday in an interview with Welt am Sonntag newspaper that there’s no way he’ll be able to balance the budget over the four-year legislative term.

‘Needs an Impulse’

With Germany, the world’s biggest exporter, struggling to recover from recession, it is “naturally” impossible to eliminate the deficit during Merkel’s second term, Schaeuble, 67, said. “It certainly doesn’t make sense to talk about savings measures at a time when the economy needs an impulse.”

The coalition’s tax-cut plan split the difference between Merkel’s 15 billion-euro target and the FDP’s 35 billion-euro campaign pledge. It’s aimed at low and mid-level earners, starting Jan. 1 with relief for families with children.

“There is no alternative to the chosen strategy of consolidating public finances not in 2010, but only later,” Andreas Rees, an economist at Unicredit SpA in Munich, said in a note. “It does not make sense to cut public spending already next year when unemployment is expected to soar by at least 500,000.”

Germany’s benchmark DAX Index rose for the first time in three days, gaining 0.4 percent to 5,762.94 as of 1:18 p.m. in Frankfurt. Even so, consumer confidence unexpectedly fell for the first time in more than a year as concerns that job losses will erode spending power outweighed signs of economic recovery.

Consumer Spending

“I’m firmly convinced that not only 2010, but also 2011 will be strongly affected by this crisis,” Merkel told delegates. “We know that unemployment is going to rise and that’s why we have to do everything to strengthen consumer spending.”

The bargaining over tax cuts follows the Sept. 27 vote that ejected Merkel’s Social Democratic coalition partners. The Social Democrats said a budget deficit the government forecasts at exceeding 5 percent in 2010 leaves no room for lower levies, even after the deepest slump since the Great Depression.

Wolfgang Boehmer, Christian Democratic prime minister of the eastern state of Saxony-Anhalt, told ZDF television last night that he’s concerned how Merkel will pay for the tax cuts.

“A clear way of counter-financing isn’t in sight yet,” Boehmer said. “I can’t agree to anything that makes existing budget gaps even bigger.”

Focusing on cutting the deficit now “would be exactly the wrong signal,” Schaeuble told the same program. “The whole world sees it that way. We’re already criticized internationally for not running up the deficit enough.”

Disputed Ministry

The Finance Ministry was the most disputed post of the coalition agreement that sees FDP leader Guido Westerwelle, 47, assume the joint role of foreign minister and vice chancellor. Karl-Theodor zu Guttenberg, 37, will take over the Defense Ministry and be replaced as economy minister by the FDP’s Rainer Bruederle.

Wheelchair-bound Schaeuble, who was paralyzed from the chest down by a deranged gunman at a political rally in 1990, served as interior minister for four years under Merkel. Schaeuble aided Merkel’s ascent in politics. She toppled him from the party chairmanship in 2000 because of his links to a party-financing scandal under former Chancellor Helmut Kohl.

“He has the strength to drive things through,” Stefan Bielmeier, an economist at Deutsche Bank AG, said in an interview from Frankfurt.

He may make more enemies as he tries to rein in spending for a government that’s accumulated record debt.

Schaeuble has previously involved himself in finance issues. He championed a CDU plan to simplify the tax system in the late 1990s as leader of the party’s parliamentary group. Last year he pilloried executives earning inflated salaries soon after the financial system nearly collapsed.

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

Last Updated: October 26, 2009 10:45 EDT