Merkel handed massive bill as court strikes down benefits system

Angela Merkel's government was facing a massive new bill for the country's welfare state yesterday, after Germany's highest court declared the benefits system unconstitutional.

The verdict on the programme, Germany's biggest and possibly most unpopular post-war social reform project, was handed down by judges who concluded it was in breach of the constitution because it failed to ensure its 6.7 million recipients received a "dignified minimum income." Chancellor Merkel could be forced to make significant increases in welfare payments that already cost taxpayers billions.

The court gave Ms Merkel's government until the end of the year to come up with a new system to replace the five-year-old social benefit payment programme, known as Hartz IV, by January 2011. The ruling was expected to oblige her coalition to make significant increases on the €41.1bn (£36bn) it has set aside in its €328bn budget this year for Hartz IV payments. The court also ruled that urgent cases must be dealt with immediately.

"This is going to give us firm guidelines, but it will also give us huge amounts of homework to do," Ursula von der Leyen, the Labour Minister, conceded. Germany is burdened with a €100bn deficit. Its ruling coalition partners, the conservative Christian Democratic Union and liberal Free Democrats, are at loggerheads over plans for tax cuts which will now almost certainly be radically scaled back.

The case against Hartz IV was brought by three families who started taking legal action against the government in 2005 arguing that its benefits for children were arbitrary and did not even cover minimum subsistence levels. The Constitutional Court was the final stage in a lengthy appeal process.

Annelie Buntenbach, a spokesman for the trade union federation, said the ruling was a breakthrough. "This is a good day for children and families in Germany," she said. "We call upon the government to work towards an increase in the base amounts quickly."

Hartz IV, named after the former VW executive Peter Hartz, who developed the system, was hailed as Germany's biggest post-war social reform project when it was introduced by Chancellor Gerhard Schröder's coalition of Social Democrats and Greens in 2005. The legislation was praised by Angela Merkel when she was elected in 2005 as a "brave and resolute" reform.

It was designed to radically reduce the costs of what, at the time, were seen as Germany's hopelessly overburdened welfare system. However, many saw it as a brutal assault on a proud post-war tradition of social welfare.

Hartz IV rapidly became a byword for social injustice and the badge of social outcasts. The programme severely undermined support for the Social Democrats, causing thousands of party members to defect to the more radical The Left party.

Under current legislation, Hartz IV recipients are entitled to €359 a month. Children receive between €215 and €287. About 1.7 million children under 14 are Hartz IV recipients. The court declared the rules governing children in particular were not transparent enough as the needs of young children and teenagers up to 18 were not calculated separately.

However, Hans Jürgen Papier, the Constitutional Court president, did not come up with a specific amount by which the benefit should be increased and ruled only that the amounts should be based on " reliable figures" and "comprehensible calculations". German social welfare groups have repeatedly called for a €500 monthly minimum benefit payment for children.