Germany's ruling coalition has agreed on a broad package of tax, labour, pension and housing reforms, Chancellor Friedrich Merz announced at a Berlin press conference on Thursday. The deal, unveiled after extended talks between Merz's centre-right CDU and coalition partner the centre-left SPD, is intended to revive a struggling economy in Europe's biggest economy while also countering the growing appeal of the far-right Alternative for Germany (AfD).
Presenting what the coalition has titled the "Programme for Revival and Employment," Merz said the government was working to make businesses more flexible, cut red tape, protect the welfare state, and ease the burden on employees and companies through lower taxes. SPD co-chair and Federal Labor Minister Bärbel Bas described the outcome as a comprehensive plan covering 33 individual measures aimed at reshaping the labor market so that both employees and companies are strengthened.
The income tax cuts are structured to lower the burden on middle- and lower-income earners, while the cost is offset through higher rates on Germany's top earners: 45 percent on taxable income above €250,000, rising to 47 percent above €280,000. The relief comes through several mechanisms: a higher basic tax-free allowance, a higher child tax allowance, increased child benefit (Kindergeld), and a higher flat-rate deduction for employees.
Finance Minister and Vice Chancellor Lars Klingbeil of the SPD said the country's highest earners would consequently shoulder a larger share of the tax burden, arguing that this was fair so the country could move forward. According to the coalition's policy paper, a working family with two children and a taxable household income of €60,000 could see annual savings of more than €600 once the reform reaches full effect in 2028, a figure both parties have also cited as a general estimate of relief for an average family from 2027 onward.
Several additional tax changes are set to help finance the relief package. The flat tax rate applied to mini-jobs will rise from 2 percent to 5 percent. Tax deductibility for tradesperson and craftsman services will also be reduced, from 20 percent to 15 percent, lowering the maximum deductible amount from 1,200 euros to 900 euros per year.
The coalition has committed to translating the recommendations of the Pension Commission into a legislative package, to be passed by the Bundestag before the end of 2026. The government described the commission's report as groundbreaking for Germany's social welfare system, its standing as a business location, and society as a whole. As part of this reform, the retirement age will gradually rise beyond 67, one of the more concrete and politically sensitive elements of the package.
The coalition has decided to abolish the practice of issuing sick notes over the phone, a measure introduced during the pandemic that had drawn increasing criticism from employer associations and Union lawmakers over Germany's high rate of sick days. Employees will now be required to submit a certificate of incapacity to work from the first day of illness, rather than after a grace period.
Penalties for falsely issuing a certificate of incapacity to work will also increase under Section 278 of the Criminal Code, which currently allows for up to two years in prison or a fine for issuing inaccurate health certificates. Alongside these changes, the government pointed to plans under the Primary Care Physician Act to introduce a guaranteed appointment scheme for specialist doctors, and said it would establish legally regulated screening for heart attack prevention.
The coalition will also move to prevent the nationalization of private housing companies and rental apartments through so-called socialization laws, which some German states have sought to use to bring private housing stock under public ownership.
CSU leader and Bavarian Minister President Markus Söder pointed to debates in Berlin over whether privately owned housing portfolios could be nationalized, arguing that such discussions have already caused hesitation in the housing construction sector and could create difficulties for banks involved in financing.
The issue has particular resonance in Berlin, where a 2021 referendum saw a majority of voters back a campaign known as "Deutsche Wohnen & Co. Enteignen," calling for the expropriation of large housing corporations. In response, Berlin's state parliament passed a framework law in March of this year that would, in principle, make such expropriation possible. The coalition's new federal legislation is intended to override that possibility at the national level.
Unlike the tax, pension and housing measures, the coalition has not yet finalized a new Arbeitszeitgesetz (working-hours law). Merz said that topic will be discussed further over the course of the summer. The unresolved issue centers on a coalition-treaty commitment to replace Germany's daily maximum working-hour limit with a weekly one.
A draft from the Federal Labour Ministry that surfaced in June proposed tying that shift to collective bargaining agreements and introducing stricter working-time recording rules, a proposal that drew sharp criticism from the CDU/CSU and several business associations.
As a related, already-agreed step, the coalition confirmed an expansion of an existing exemption in the working-hours law covering Sunday and holiday work: starting January 1, 2027, bakeries, patisseries, and public libraries will be permitted longer Sunday opening hours, an extension foreshadowed in the coalition treaty's provisions for the baking trade.
The coalition will pass a law broadly abolishing government reporting and documentation requirements, aiming to eliminate at least a quarter of remaining reporting duties within twelve months, while preserving existing standards on human rights, consumer rights, worker rights, and tax-fraud prevention.
Mandatory in-house compliance officer roles not required by EU law will be abolished, shifting more responsibility onto companies themselves, backed by higher penalties for violations. Administrative approvals will also be streamlined: applications will be automatically deemed approved four months after submission unless a specific review is flagged, with full implementation targeted for the end of 2027.
Fixed-term employment contracts without cause will be extendable up to 48 months, with as many as six renewals allowed, for employees hired by the end of 2030; a special provision will also allow a repeat hire at the same employer to be treated as a fresh first-time hire under this rule, bypassing the usual ban on rehiring former employees without cause.
The tax-privileged threshold for Sunday and holiday pay bonuses will rise to a €75 hourly wage from January 1, 2027, and such bonuses will become fully contribution-free within the scope of a collective bargaining agreement.
Germany's export-driven industry, long the backbone of its economic strength, has been hit in recent years by rising energy and labour costs, persistent bureaucratic hurdles, intensifying competition from Chinese manufacturers, and the unpredictable tariff policies pursued by US President Donald Trump. "We are doing everything we can to overcome our country's structural weakness when it comes to economic growth," Merz said, acknowledging that the government was "under pressure from many sides."
The reform package also carries clear political stakes. The coalition, in power since May of the previous year, has faced months of difficulty reaching agreement on contentious issues, and the government is eager to demonstrate it can deliver solutions while blunting support for the AfD, which has been leading national opinion polls for months.
The stakes are especially high ahead of regional elections in September in AfD strongholds across formerly communist eastern Germany, where the party could plausibly lead a state government for the first time, an outcome without precedent in post-war Germany that would further highlight Merz's weak approval ratings.
Marion Muehlberger, senior economist at Deutsche Bank, described the announcement as one of Germany's biggest reform packages in decades, pointing to it as evidence of the government's capacity to agree on structural reforms. She added that the package should support economic sentiment and aligns with expectations that growth will pick up in the second half of the year.
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