FACTBOX-Economic policy in the next German government

BERLIN, Sept 23 - German Chancellor Angela Merkel is seeking re-election in a federal vote on Sunday and polls suggest her conservatives may be able to form a coalition with the pro-business Free Democrats (FDP).

The most likely alternative is a continuation of Merkel's "grand coalition" of traditional rivals, including her Christian Democrats (CDU), their Bavarian Christian Social Union (CSU) allies, and the centre-left Social Democrats (SPD).

Other ruling partnerships are theoretically possible, but considered unlikely. Below are the most probable coalition scenarios and how they would likely affect German economic policy:

CENTRE-RIGHT ALLIANCE (CDU/CSU and FDP)

GENERAL - A smaller role for the state will be sought.

TAXES - The coalition will push for lower income tax, though cuts seem unlikely to ensue immediately due to the budget deficit. Cuts are likely to be based on a compromise between the two sides' proposals. The FDP wants to introduce three main bands of 35, 25 and 10 percent compared to rates of 42, 24, and 14 percent effective from 2010. Merkel's conservatives plan to cut the bottom bracket to 12 percent and to raise the threshold from which income is taxed at the highest regular rate to 60,000 euros ($83,600) from 52,552 euros. The FDP opposes tax hikes, but the conservatives have explored the possibility of raising the reduced rate of VAT levied on certain items.

JOBS - The FDP has campaigned for labour market reforms that would make it easier for firms to hire and fire. However, Merkel has set herself against such a move.

BUDGET - Consolidation of the budget could involve cuts to subsidies. Reform of state healthcare funding could also benefit the public purse, which may get an additional boost if the coalition goes ahead with plans to relaunch a stalled partial privatisation of national rail operator Deutsche Bahn.

GRAND COALITION (CDU/CSU and SPD)

GENERAL - A grand coalition would probably be more interventionist than a centre-right government.

TAXES - The SPD proposes cutting the lowest income tax rate to 10 percent, providing scope for agreement with conservatives. However, it wants to raise the so called "rich tax" rate to 47 percent from 45 percent and lower the threshold from which it is applied to 125,000 euros from 250,000 euros. SPD Finance Minister Peer Steinbrueck has also said he is open to considering an increase in the discounted rate of VAT.

JOBS - Liberalising the labour market appears unlikely. Agreement on a minimum wage for more sectors of the economy could result if the SPD presses for a blanket wage floor.

BUDGET - Restoring Germany's finances to health is likely to be one of the strongest areas of consensus. One target could be a tax break for commuters, which would save billions of euros if cut. Some economists say tax hikes would be possible, although Merkel's conservatives have ruled these out. A flotation of Deutsche Bahn appears unlikely.

OTHER CONSTELLATIONS

The three other coalitions that are theoertically possible but unlikely after the German election are a CDU/CSU partnership with the Greens, an three-way "traffic light" coalition betweent the SPD, FDP and Greens and a CDU/CSU government with the FDP and Greens.

BUDGET - Among the three configurations, agreement on steps to cut public spending may be possible, though all there would be disagreement on where to cut.

TAX - Tax policy would be divisive in either of the coalitions involving the FDP due to differences with the Greens. The CDU/CSU and Greens would probably have an easier time forging compromises on income tax cuts, but could be at loggerheads on corporate and inheritance tax changes.

RED TAPE - Progress might be made on improving conditions for small businesses, with cuts to red tape a possibility.