"It is all geared to creating jobs," Chancellor Angela Merkel said, calling the coalition pact, finalised after three weeks of tough negotiations in the early hours of Saturday, Germany's "answer to the crisis."
"We have agreed a coalition programme showing that we want to advance courageously into the future," she said. "We are aiming for growth, for the creation of an education republic and social cohesion."
"The burden on families has to be lessened, the burden on companies and inheritance tax has to be reformed," Merkel told reporters.
Merkel, 55, won a second term in elections on September 27, ditching her previous coalition partners, the centre-left Social Democrats, in favour of the pro-business Free Democrats (FDP).
The cuts, some of which will take effect from January 1 2010, come despite the parlous state of Germany's public finances, with the national debt currently standing at around €1.5 trillion ($2.25 trillion) - and growing fast.
Germany already spends tens of billions in interest payments on its debts each year, and it will borrow hundreds of billions of euros more over the next few years as the country reels from its worst recession since World War II.
The new government argues that the economic growth that the cuts will trigger will help cover the cost, together with as yet unspecified reductions in public spending.
The FDP, led by Guido Westerwelle, who will be vice-chancellor and foreign minister, had promised voters €35 billion worth of tax cuts but Merkel wanted €15 billion worth, making this the thorniest issue in the coalition talks.
Westerwelle, 47, said that Germany's taxation system would be simplified, and that the new government wanted the country to become "the best in the world" in education and research in order to ensure long-term prosperity.
"Courage for the future, that is the central theme," he said.
In other areas, agreement came more easily for the two parties, who have a long history of being in coalition, governing together for 28 years since 1949 when then West Germany was founded.
The government wants to reform Germany's creaking health care system by changing the way premiums are set, with the details to be hammered out by a specially created committee. Employee contributions are likely to rise. After the far-reaching changes by Merkel's SPD predecessor Gerhard Schröder, chancellor from 1998 to 2005, the FDP failed to convince her party to go further and make it easier for firms to hire and fire workers, however.
They plan to scrap the 2000 decision to abandon nuclear power by around 2020 by extending the life of some reactors, much to the annoyance of environmentalists, who have promised protests if this goes ahead.
In foreign policy, Merkel's conservative CDU/CSU alliance and the FDP want to press for the Afghan government to assume more responsibilities so that Germany's 4,400 troops can come home.
The FDP succeeded in softening somewhat Merkel's position on Turkish membership of the European Union, meaning that the door will remain open, while stressing that Turkish membership is neither automatic nor guaranteed.
In terms of ministerial appointments, wheelchair-bound CDU veteran Wolfgang Schäuble, 67, current interior minister and the former right hand man of ex-chancellor Helmut Kohl, was set to become finance minister.
The aristocratic Karl-Theodor zu Guttenberg, 37, economy minister and Germany's most popular politician, was set to move to defence. Rainer Brüderle, 64, deputy chairman of the FDP moves to the economy.
Thomas de Maizičre, 54, Merkel's trusted lieutenant since 2005 as her chief of staff, has been rewarded for his loyalty with the post of interior minister. His main tasks will be tackling the threat of Islamic extremism and fostering better integration of ethnic minorities.