Germany's ruling coalition, comprising the Christian Democratic Union (CDU), its Bavarian sister party the Christian Social Union (CSU), and the Social Democratic Party (SPD), presented a comprehensive reform package on Thursday. The 34 measures are designed to jumpstart the country's sluggish economy and address long-standing structural issues.
Chancellor Friedrich Merz, speaking at a press conference in Berlin after seven hours of negotiations, outlined the government's priorities. "We are working to increase the flexibility of our businesses," Merz said. "We are working to cut red tape. We are working to protect our welfare state, and we are working to ease the burden on employees and companies by lowering taxes." The package, dubbed the "Programme for Revival and Employment," includes significant changes to income tax, pensions, and sick leave policies.
Key Reforms at a Glance
The most notable tax reform involves a tiered increase in the top rate for high earners. The current top rate of 42% will remain unchanged but will now apply only to incomes above €70,000, up from the previous threshold. A new "rich tax" will introduce rates of 45% for incomes above €250,000 and 47% for those exceeding €280,000. The coalition describes this as a "fair sharing of the burden." The total tax relief is estimated at approximately €10 billion per year, with an average family expected to be about €600 better off annually.
On pensions, the government will gradually raise the retirement age—currently between 65 and 67, depending on years worked—in line with life expectancy. This follows recommendations from a government-mandated expert panel aimed at stabilising the pension system without drastically increasing employee contributions. Labour Minister Bärbel Bas (SPD) called the pension package a "masterpiece," and Merz pledged to implement the proposals.
Labour market reforms include expanding options for fixed-term employment contracts and allowing longer Sunday opening hours to boost flexibility. However, the most contentious change is the tightening of sick leave rules. Employees will now be required to present a doctor's certificate from the first day of illness, ending the practice of self-certification for up to three days. Merz had repeatedly argued that Germany's high sick leave rate harms productivity.
Other measures include a ban on the nationalisation of housing companies to reduce investor uncertainty, and the introduction of sunset clauses for state benefits to cut red tape.
The reforms come amid mounting political pressure. State elections are scheduled for September in Saxony-Anhalt, Berlin, and Mecklenburg-Western Pomerania, where the far-right Alternative for Germany (AfD) is leading in polls. The coalition hopes the package will diminish the AfD's appeal by demonstrating effective governance. In Berlin, the CDU under Kai Wegner has slipped to fourth place in a recent RBB poll, trailing the Left, the AfD, and the Greens.
Alice Weidel, co-leader of the AfD, which placed second in last year's national elections, dismissed the reforms on X, calling them an "even more left-wing redistribution and minimal compromises that don’t deserve to be called 'reforms.'"
The most contentious negotiations were over tax reforms, with the SPD pushing for higher contributions from the wealthy, while the CDU/CSU had initially ruled out tax increases. The final compromise reflects a delicate balance within the coalition.
Germany's economic challenges are part of a broader European context. As other EU member states grapple with similar issues of competitiveness and demographic change, Berlin's approach will be closely watched. The reforms also coincide with ongoing debates across the continent about labour market flexibility and social welfare sustainability.
