CHANCELLOR ANGELA Merkel’s cabinet has approved a 2011 federal budget that includes €11 billion in cuts – or 3.8 per cent of total spending.

The budget draft, which now goes to parliament for approval, is the first stage of Berlin’s controversial four-year, €82 billion austerity package. Germany has defended the package as essential for economic recovery and to adhere to new “debt break” measures: next year will see fresh borrowing fall by 12 per cent to €57.5 billion.

Critics of the plan, including Washington, worry the measures will stifle economic growth in Germany, the euro zone and beyond.

“Our aim is to scale back excessive deficits and ensure our economic development is sustainable,” said finance minister Wolfgang Schäuble. “This budget and the mid-term spending plan are influenced heavily by the banking and economic crisis.”

After cutting its deficit last year to 3.1 per cent of gross domestic product (GDP), Berlin’s budget deficit is expected to hit 5.5 per cent in 2010. Though far below levels in other euro zone countries, it’s still almost double levels permitted by euro zone rules.

Officials in Berlin insist the measures are weighted not to halt growth but to add momentum to Germany’s economic recovery. Unemployment has been falling for a year and business confidence has hit a two-year high.

The plan includes drastic cuts to many federal ministry budgets. Hardest hit is the labour ministry, with reductions in welfare benefits to cover an 8 per cent budget cut. Next is the agriculture ministry with a 6 per cent cut.

Excluded from cuts are spending on education and the environment, set to rise by 7 and 6 per cent respectively.

The austerity plan includes a tax on financial transactions estimated to generated €2 billion from banks. A similar amount of money may be earned from a yet-to-be-agreed tax on nuclear power plants.

A prominent victim of cutbacks is the project to rebuild the Prussian palace in Berlin, demolished by the East German authorities in 1950. The ambitious endeavour, costing at least €550 million, has been put on ice indefinitely.

Unions have complained that the cuts unfairly target the weakest in society. They are planning widespread industrial action ahead of November’s parliamentary vote on the 2011 budget.

“The government is quite clearly making savings at the expense of the poorest of our society,” said Claus Matecki of the German Federation of Unions.