Germany's Finance Minister, Mr Hans Eichel, will today announce sweeping budget cuts and changes to the tax system, aimed at tackling Germany's massive public debt and kick-starting its sluggish economy. The chancellor, Mr Gerhard Schroder, hailed the plan, which will cut DM30 billion (€15.33 billion) from public spending, as the biggest political reform project in Germany's post-war history.

Almost half of the savings will come from changes to pensions and unemployment benefit, but the cuts will affect almost all government departments. For at least the next two years, pensions and other benefits will be linked to inflation rather than to the general level of wage increases, a measure that will save the state almost DM13 billion.

But the government has shelved a controversial plan to oblige employees to pay into private pension schemes alongside their state pensions. The proposal provoked a public outcry, with the opposition Christian Democrats threatening to organise street protests against it.

Mr Eichel was determined to finance the budget cuts without increasing taxes, which could stifle the domestic demand needed to boost economic growth. Companies are likely to see their tax burden fall by a total of DM8 billion, as a result of a cut in the basic corporate tax rate to 25 per cent.

"This low tax rate will further strengthen Germany's international competitiveness for investors," the draft budget statement says.

Germany's governing coalition spent much of yesterday finalising details of the plan, which some Social Democrats felt was too harsh on the weaker sections of society. Trade unions criticised plans to cut public service jobs, but employers' leaders welcomed the budget cuts as a move in the right direction.

Mr Schroder said in an interview with ZDF television yesterday evening that he would press on with "painful reform measures" and not let the prospect of further defeats in upcoming state elections distract him.

"We are going to cut taxes," he said. "We will not raise taxes. We will cut spending. There is no other way.

"This is about Germany's future. We can't just keep going on the way we have, otherwise we would lose our ability to act. We have to take these enormously painful steps and it doesn't surprise me there are people out there clenching their teeth."