Germany Unveils Sweeping Economic Reform Package

Chancellor Friedrich Merz unveiled a package that provides €10 billion in tax relief for low-income households, raises the top income-tax rate to 47 % for earnings above €280,000, requires a day-one medical certificate, expands fixed-term contracts, introduces a Swedish-style pension fund, cuts federal staff by 8 %, and funds housing.

The Independent

Germany’s recovery is hit by energy costs from the Ukraine war and Iran conflict. The government cut its 2026 growth forecast to 0.5 % and its 2027 outlook to 0.9 % (down from 1.3 %). The coalition trails the AfD in polls and faces an AfD win in Saxony-Anhalt election.

The Independent

Chancellor Friedrich Merz and Finance Minister Lars Klingbeil presented reforms. Rainer Dulger welcomed plan; Christiane Benner (IG Metall) praised tax relief but warned expanding fixed-term contracts attack workers’ rights. Clemens Fuest warned package lacks spending cuts, and Markus Blumenthal-Beier criticised sick-note changes.

The Independent

The package provides €10 billion in tax cuts, financed by raising the top rate from 45 % to 47 % for incomes >= €280,000, and seeks an 8 % reduction in federal staff. The pension reform is slated for parliamentary approval by year-end.

The Independent

Supporters say lower taxes and flexible labour rules will boost competitiveness and attract investment, while pension reform aims to secure finances for an ageing population. Critics warn medical certificates could strain primary-care and expanded fixed-term contracts may erode job security.

The Independent

Merz said reforms aim to restore Germany’s competitiveness and called the sick-note change a necessary, though difficult, decision. Klingbeil announced tougher stance toward China and pledged to shield German firms from unfair competition. Coalition confirmed pension reform will be enacted by year-end.

The Independent

IG Metall called expansion of fixed-term contracts an “attack on workers’ rights.” Ifo Institute’s Clemens Fuest warned package lacks spending cuts. Markus Blumenthal-Beier called sick-note reform “absolutely catastrophic,” fearing a health-system bottleneck. Employers warned pension contributions could raise hiring costs.

The Independent

Deutsche Bank Research called the package most significant reform effort and forecast a sentiment boost. Unions and institutes stress lack of spending cuts and warn of costs. The reform document mentions strengthening EU anti-dumping measures but gives no detail on actions against China.

The Independent

• “We want to get Germany back on track,” — Friedrich Merz, Chancellor

The Independent

• “We know this is a tough decision. But we can no longer afford this competitive disadvantage caused by prolonged absences from work,” — Friedrich Merz, Chancellor

The Independent

• “The reform package's greatest weakness is the absence of measures to consolidate government spending,” — Clemens Fuest, President, Ifo Institute

The Independent

• “absolutely catastrophic” — Markus Blumenthal-Beier, Head, German Association of General Practitioners

The Independent

Parliament is expected to approve pension reform before year-end, after which sick-leave and tax measures will be implemented. Labour-market effects will be monitored, and September Saxony-Anhalt election could shift the coalition’s standing.

The Independent