Key Takeaways:
German Chancellor Friedrich Merz staked his political future on a 34-point reform package Thursday that cuts income taxes by €10 billion annually, raises the retirement age and eases labor market rules — a bid to revive an economy that has stagnated for three years.
"Right from the start, we set ourselves an agenda with a single goal: we want to get Germany back on its feet," Merz said at a press conference in Berlin alongside coalition ministers. "I understand people's nostalgia for the past, but we cannot hide in the past."
The package targets five areas — taxation, welfare, labor markets, bureaucracy and trade — and represents the coalition's most ambitious domestic policy push since taking office. Merz's CDU/CSU bloc trails the far-right Alternative fuer Deutschland by three to five points in national polls ahead of September state elections in Saxony-Anhalt, where the AfD consistently polls above 40%.
Tax relief for households, higher burden on top earners
Working families with two children will receive more than €600 in annual income tax relief through higher allowances and reduced bracket progression, the government said. The €10 billion in annual relief will be financed by raising the top marginal tax rate to 47% from 45% for individuals earning €280,000 or more in taxable income — a threshold the government estimates affects roughly 2% of taxpayers.
The tax changes take effect in 2027, with the federal government pledging to compensate states and municipalities for revenue shortfalls. Germany's weighted-average tax-to-GDP ratio stood at 39.3% in 2025, above the OECD average of 34%, according to the Finance Ministry.
Pension overhaul and labor market flexibility
The government will implement recommendations from the pension commission to introduce a capital markets-based element to the state pension system, alongside a gradual increase in the retirement age from 67 to 70 over coming decades. The move mirrors Sweden's shift to a funded pension pillar in the 1990s, which now accounts for roughly 20% of retirement income for Swedish workers.
Companies will gain the ability to offer fixed-term contracts for up to 48 months for new hires through 2030, and will face fewer restrictions on dismissal-with-compensation arrangements for high earners. Workers will no longer be able to call in sick by telephone — medical certificates from day one will be required, a measure aimed at reducing Germany's sick leave rate, which hit a record 6.2% of working days in 2025, according to the Federal Statistical Office.
Stressed sectors including automotive, steel, chemicals and engineering may receive exemptions from certain labor market regulations, the government said.
Bureaucracy cuts and trade push
Administrative applications including building permits and business licenses will be deemed automatically approved if authorities fail to respond within four months. The government targets an 8% reduction in staffing across most federal ministries through digitization and attrition, and will cut reporting requirements for businesses while limiting supply chain due diligence obligations to very large companies.
On trade, Berlin will push the European Commission to accelerate new trade agreements and strengthen anti-dumping and anti-subsidy tools. Technology-transfer requirements will be considered for non-European investments in strategic sectors.
Mixed reception from business
The capital goods manufacturers' association VDMA called the package a "good start" but said the tax provisions could raise costs for many small and mid-sized business owners. Marcus Berret, global president of Roland Berger, said the plan signals Germany is "prepared to address long-standing structural challenges" but stressed that "the focus now must be on rapid implementation, then continuing forward."
Germany's economy contracted 0.3% in 2025 and has grown at an average of just 0.2% annually since 2022, underperforming the euro-area average of 1.1% over the same period. The government aims to pass the main elements of the package through parliament by year-end.
This article is for informational purposes only and does not constitute investment advice.
