By Thorsten Severin and Andreas Rinke
BERLIN (Reuters) - German Chancellor Angela Merkel's center-right coalition reached agreement on Monday on contentious social welfare issues that it hopes will bolster its support in the countdown to federal elections next September.
After nearly eight hours of talks that underlined the degree of discord simmering within her three-party government, Merkel and other leaders agreed to scrap an unpopular health surcharge and to introduce extra child benefits, coalition leaders said.
Merkel's junior coalition partners, the pro-business Free Democrats (FDP), are particularly eager to impress voters after opinion polls have regularly shown them failing to clear the five percent threshold for staying in parliament next year.
The FDP has long had to accept that tax cuts, one of the party's traditional policy cornerstones, are not possible at a time of fiscal austerity, with Merkel leading the euro zone's efforts to overcome its three-year-old sovereign debt crisis.
Instead, the FDP has pushed hard for abolition of the 10-euro-per-quarter payments for visits to the doctor, saying they have spawned red tape without reducing waiting times.
Merkel's FDP health minister, Daniel Bahr, rejected the center-left opposition's charges that the deal amounted to an attempt to bribe voters ahead of a state election in Lower Saxony in January and federal elections in September.
"This is about helping our citizens. It's not about whether opinion polls are better are worse from week to week but making the right decision for Germany," Bahr told German radio.
The coalition, plagued by squabbles since taking power in 2009, aims to balance Germany's budget by 2014, helped by robust economic growth that has bucked the euro zone trend, although strong tax revenues are expected to tail off next year.
In return, the FDP reluctantly backed benefit payments for parents who keep their toddlers at home, a policy championed by the Christian Social Union (CSU), the conservative Bavarian sister party of Merkel's Christian Democrats (CDU).
Critics, including in the FDP, CDU and the opposition say this will keep women out of the workplace and children of poorer immigrants out of kindergartens where they would learn German and integrate.
The center-left Social Democrats (SPD), who have taken a more assertive political stance since choosing former finance minister Per Steinbrueck as their candidate for chancellor next year, have vowed to challenge the child benefit plan in court.
The payments will only start from next August, shortly before the federal election, to coincide with the deadline for the government to provide kindergarten places for all toddlers.
SPD parliamentary floor leader Thomas Oppermann denounced the coalition deal as political "horse-trading" and told German radio: "Taxpayers will be financing this election gift".
In their talks, billed as the last chance to launch large projects in this parliament, coalition leaders also spoke about investment in transport and steps to help poorer pensioners.
Economy Minister Philipp Roesler, the FDP leader, said the costs of the deal would be financed from the hefty surpluses of health insurance schemes, meaning the changes "contribute directly to the target of a balanced budget for 2014".
Finance Minister Wolfgang Schaeuble, attending G20 talks in Mexico, was absent from the meeting, but ensured there would be no generous tax promises by bringing forward the balanced-budget goal set by Germany's "debt brake" law by two years from 2016.
Merkel's conservatives remain the most popular force in German politics with 38 percent support, an opinion poll published showed on Sunday, well ahead of the SPD's 29 percent.
But the poll, published in the Bild am Sonntag newspaper, confirmed the FDP, on just 4 percent, would fail to win seats in the new Bundestag, or lower house of parliament. The SPD's favored coalition partner, the Greens, were on 13 percent.
Such electoral arithmetic suggests Merkel might have to build a 'grand coalition' with the center-left SPD after the 2013 election, like the one she led from 2005 until 2009.
(Reporting by Thorsten Severin and Andreas Rinke; Writing by Gareth Jones and Stephen Brown; Editing by Paul Simao and Alistair Lyon)