Christmas came early in Germany yesterday after the government and opposition finally agreed a package of reforms and tax cuts following a tortuous nine-hour last round of negotiations.

Chancellor Gerhard Schröder got the reforms he wanted - after linking the fate of the reforms to his political future - but only after making several concessions to the opposition conservatives.

They forced him to halve planned tax cuts to just €7.5 billion and loosen even further hire-fire laws, but the reform package is likely to come into force as planned on January 1st.

"It's a signal that the German people were waiting for," said a glassy-eyed Mr Schröder after the negotiations ended at 3.30 a.m. yesterday. "It is an important decision that will bring forward the economic development in Germany."

From January 1st, Germany's two income tax levels will fall to 16 and 45 per cent, with a further 3 per cent cut for each band in 2005.

Germany's conservatives blocked proposals to introduce €15 billion in tax cuts at once next year, fearing plans to finance the tax cut with new debt would damage rather than revive the economy.

Now only a quarter of the cut will be debt-financed with the rest financed by selling government holdings in Deutsche Telekom and Deutsche Post.

Other compromises won by the opposition conservatives will see employment protection laws in the future only apply to companies with more than 10 employees. Unemployed people will be forced to accept any work offered to them or face a cut in benefits.

The Economics and Labour Minister, Mr Wolfgang Clement, said the tax cuts should translate into up to 0.6 per cent in additional growth next year.

Economists were less optimistic, saying that reduced tax cuts and cuts in other subsidies give the impression that the government is giving with one hand and taking with the other.

"We expect no economic effect, rather disappointment will dominate," said Mr Rüdiger Parsche of the Ifo economic institute. "Rather than a big starting shot, this is a mini-reform."

The reform package, totalling 2,800 pages, is expected to pass the upper and lower houses on Friday.

Some left-wingers in Mr Schröder's Social Democratic Party say the reforms are a sell-out and plan to vote against them, endangering the government's nine-seat majority and perhaps forcing it to rely on votes from the opposition.