German government agrees new 2.4 billion euro basic child allowance

BERLIN (Reuters) -Germany's governing coalition has agreed on a new basic child benefit allowance at an initial cost of around 2.4 billion euros ($2.6 billion) from 2025.

Chancellor Olaf Scholz of the centre-left SPD, family minister Lisa Paus of the Greens and Finance Minister Christian Lindner of the liberal FDP reached an agreement after a meeting late on Sunday, ending a dispute that has blocked other government initiatives.

The allowance will bundle together different benefits that already exist, while improving access to the payments through digitalisation and automation, Paus and Lindner said at a press conference in Berlin on Monday.

Child payments are currently fixed at 250 euros per month per child regardless of parental income with additional benefits for lower-income families. The government said it could not yet say how much payments would amount to in 2025.

Paus expects the cost of the new allowance to reach around 6 billion euros in 2028, depending on take up, three times the two billion euros per year earmarked in the government's medium-term financial plan.

That higher than expected cost adds to bottlenecks in the budget, Lindner said.

"With a view to the next few years, the basic child allowance will be the last major social reform that still fits into the federal government's budgetary framework," he added.

Earlier this month, the German cabinet failed to pass the Growth Opportunities Act, a programme of corporate tax relief worth billions of euros championed by Lindner, as wrangling in Scholz's three-way coalition continued.

The talks stumbled on Paus' demands to raise spending on child support in tandem with the corporate tax benefits and the compromise clears the way for Lindner's programme ahead of a cabinet retreat in Meseberg, Brandenburg, that begins on Tuesday.

"Our concern is to maintain work incentives," Lindner said, adding that employment would be a prerequisite to access some allowances as parental unemployment, often linked to a lack of integration or language skills, was a key driver of childhood poverty.

"The best way to overcome poverty is to work," Lindner said.

The draft law for the basic child allowance will be submitted to the states and municipalities for consultation, potentially allowing the draft law to be approved by the cabinet on Sept. 13, Paus said, before it is submitted to the Bundestag.

($1 = 0.9255 euros)

(Reporting by Holger Hansen, Andreas Rinke, Christian Kraemer and Maria Martinez, Editing by Friederike Heine, Kirsten Donovan)