Merz unveils major German economic reform package including tax cuts

German Chancellor Friedrich Merz and his government coalition partners presented a comprehensive reform package Thursday with the goal of getting the country’s sluggish economy back on track. The 34 measures include cuts to income tax for low- and middle income families, an overhaul of the creaking pension system, tougher rules for employees’ sick leave and a reduction of the country’s stifling bureaucracy.

Germany’s economy returned to modest growth last year after shrinking for two years in a row. The government expects underwhelming growth of 0.5% this year, a figure that has been pushed down by the fallout from the war in Iran. The country of 83.5 million people already faced increasing competition from Chinese companies, higher energy costs following Russia’s full-scale invasion of Ukraine and issues including U.S. President Donald Trump ’s tariffs and trade threats. On top of that, it has deeper problems such as high production costs, lagging private investment and increasingly costly health and pension systems caused by an aging population.

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Chancellor Merz described the initiative as a necessary step for the country's long-term stability.

“These reforms all have one goal: We’re setting out into the future,” Merz said Thursday. “We’re strengthening ourselves so that we can live well in these new times.”

Friedrich Merz, Chancellor, via AP

Structural Reform Pillars

The reform package aims to modernize several key sectors:

• Taxation: The government coalition leaders said that the tax cuts, once fully implemented in 2028, would give an annual tax break of about 600 euros ($64.40) for a family with two working parents, two children and a total taxable income of 60,000 euros ($64,416). The total tax relief provided by the reform amounts to approximately 10 billion euros ($11.4 billion) per year.
• Pension System: The pension system reform would include gradually raising the retirement age, currently between 65 and 67 years depending on the number of years worked, in line with life expectancy. The coalition leaders said they would implement the recommendations presented by a government-mandated panel of experts and politicians last month to stabilize the pension system. The aim is to prevent the level of pensions from falling and ward off the need for a big, long-term increase of the levy employees pay into the pension system.
• Labor and Bureaucracy: The tougher rules for sick leave would no longer allow employees to call in sick to work for up to three days without seeing a doctor or call up the doctor and ask for a sick leave letter of one week without actually seeing the doctor. Instead, employers would be able to ask for a doctor's certificate from the first day a person is on sick leave. When it comes to Germany's runaway bureaucracy, various reporting and documentation requirements are to be eliminated, and data protection is to be reduced to the European minimum, the government said, adding that there would also be less red tape when it comes to filing tax returns.

Political and Economic Reception

Alice Weidel, the co-leader of the far-right Alternative for Germany party, which placed second in national elections last year, derided the reform package.

“The fact that this is being sold as a ‘breakthrough’ shows only one thing: this government’s complete inability to reform,” she wrote.

Alice Weidel, co-leader of the Alternative for Germany party, via X