Merkel takes aim at Germany's labour benefits

BERLIN, May 29 (Reuters) Chancellor Angela Merkel said today her conservatives wanted to overhaul Germany's jobless benefit system, which has been widely abused and not as effective as originally hoped.

The government of former Chancellor Gerhard Schroeder hailed the Hartz labour laws, passed in 2003, as a major structural reform that would reduce unemployment and ease the strain caused by benefits paid to the country's nearly 5 million unemployed.

Although official jobless payments fell sharply in 2005, the first year of the Hartz reform, housing and other subsidy payments tripled. Critics of the new system say families figured out how to increase a 345 euro (0.2) monthly benefit to over 2,000 euros by tapping into the various subsidies on offer.

''We must ensure that whoever works in Germany earns more than those who don't work,'' Merkel told a news conference.

To fight abuse, the government recently decided to launch a system of blanket controls across the country that would ensure more cooperation between branches administering the benefits.

She said her conservatives (CSU/CDU) and their Social Democratic (SPD) grand coalition partners had agreed it was necessary to reform the system further.

''This will be a second step in a fundamental overhaul,'' Merkel said.

Aware of the political importance of the Hartz labour laws for the SPD, Merkel made it clear there were no plans to scrap or radically alter them as some critics have called for.

She said Volker Kauder, leader of the CDU/CSU parliamentary faction, would head a working group that would discuss possible changes to the system with representatives of German states.

The working group would focus on incentives for finding jobs, spreading out costs across the federal, state and local governments, and overhauling the system of housing and other benefits for unemployed workers.

BURDEN ON THE BUDGET Critics of the job benefits system say it encouraged people to remain jobless and also point to its cost, which at 28 billion euros is twice the Schroeder government's original estimate.

This puts pressure on the country's budget just as the government is trying to reduce it to below the European Union's Maastricht limit of 3 percent of gross domestic product.

''We have to have an agreement with the SPD on this if we're to have a budget next year that meets the Maastricht criteria,'' CDU labour market expert Ralf Brauksiepe told Reuters.

To minimise the damage to the budget, the SPD's finance and labour ministers -- Peer Steinbrueck and Franz Muentefering -- have come up with a plan to shift funds back into government coffers, the Financial Times Deutschland reported on Monday.

Citing unnamed government sources, the paper said they agreed that the 10,000 euros the Finance Ministry receives from the German Labour Office for each new long-term jobless person would be ''increased somewhat'', which should reduce the budget hole caused by higher-than-predicted spending on benefits.

REUTERS CH HS2152