Germany’s Chancellor Friedrich Merz’s coalition government has unveiled a comprehensive package of reforms, including significant tax relief for lower-income families and far-reaching changes to the pension system.
The measures, announced on Thursday, aim to revitalise growth and bolster competitiveness within Europe’s largest economy.
Economists have largely welcomed the proposals, noting that the government is finally delivering concrete changes after months of internal disagreements between Mr Merz’s conservatives and their junior coalition partner, the left-leaning Social Democrats. The reforms are designed to ease the burden on businesses by cutting red tape, granting employers greater flexibility to hire workers on short-term contracts, and making it more challenging for employees to claim sick leave.
However, the package has met with a mixed reception. While some employers have praised the initiatives, critics have variously labelled them as unfair, unworkable, or simply not ambitious enough. Mr Merz’s government, currently trailing the far-right Alternative for Germany party in opinion polls, has underscored the urgent need for these reforms amidst fierce international competition and a rapidly evolving global landscape, where Germany risks falling behind.
“We want to get Germany back on track,” Mr Merz told reporters. The measures include €10 billion ($11 billion) in annual tax relief for lower-income earners, building more affordable housing and an action plan against benefit fraud. The government aims to cut staffing by 8% in federal ministries through digitisation.
The tax relief will be mainly funded by raising the top rate of tax to 47% from 45% for the highest earners with an annual income of €280,000 or more.
Mr Merz also announced sweeping changes to sick leave rules, including scrapping the right for Germans to get a sick note by telephone and introducing a requirement for workers to “submit a medical certificate from the very first day of illness.”
“We know this is a tough decision. But we can no longer afford this competitive disadvantage caused by prolonged absences from work,” said Mr Merz.
“The reform train has no brakes… this is a substantial package designed to strengthen Germany as a business location in the long run and put public finances on a sustainable footing,” said Carsten Brzeski, global head of macro at ING.
“One is tempted to shout, ‘Finally!’ It took a year, but the ‘summer of reform’ has arrived,” he said. Employers’ Association President Rainer Dulger welcomed the package as a “long-overdue change of course.”
Christiane Benner, chair of Germany’s largest union, IG Metall, welcomed tax relief for employees but criticised more fixed-term employment contracts as an “attack on workers’ rights.”
Work and pension changes
The German economy has been struggling since the COVID pandemic to regain momentum, with increased competition from China as well as higher energy prices caused first by the Ukraine war and now exacerbated by the Iran conflict challenging its export-driven economic model.
In a fracturing domestic political landscape, Mr Merz’s conservatives now trail the far-right AfD, which could win a state election for the first time in the eastern state of Saxony-Anhalt in September. The government in April halved its growth forecast for 2026 to 0.5% and has also cut its growth prediction for 2027 to 0.9%, down from a previous estimate of 1.3%. It also raised its inflation projections, as soaring energy prices take their toll.
“The government has demonstrated its ability to agree on key structural reforms and implement them by the end of the year,” said Marion Muehlberger from Deutsche Bank Research, calling it one of the most significant reform packages in decades. “This is likely to boost sentiment and reinforces our forecast of accelerating economic growth in the second half of the year.”
Standing alongside Mr Merz, Finance Minister Lars Klingbeil said the government was taking a tougher course against China and would protect companies from unfair competition. The reform package document did not mention China by name but aimed to strengthen European Union anti-dumping and anti-subsidy measures.
China’s vast market has provided a huge source of growth for German companies in the past, but Berlin now sees China as a global geopolitical rival and a major challenge for Germany’s once dominant industries, such as cars. On pensions, a commission appointed by Mr Merz last month has suggested a Swedish-style pension fund and a gradual increase in the retirement age to help stabilise the country’s pension system as the population ages.
The government on Thursday said parliament would pass the pension reform by the end of the year. But the reform has sparked criticism from unions who oppose raising the retirement age for those with physically demanding jobs, while employers said mandatory pension contributions by employers would make hiring more expensive.
“The reform package’s greatest weakness is the absence of measures to consolidate government spending,” Ifo institute President Clemens Fuest told Reuters. “Tax relief is not feasible in the medium term unless the growth of government spending is curbed.” Mr Merz this year annoyed Germans, who work some of the shortest hours in the European Union, by saying that habits such as four-day working weeks or taking overly long sick leave were harming the country’s competitiveness.
Markus Blumenthal-Beier, the head of the German Association of General Practitioners, told the RND media group the proposed sick note changes were “absolutely catastrophic” that would clog up the health system.
($1 = 0.8777 euros)
