German coalition approves extensive tax, labour and pension reforms

Germany's ruling coalition announced a comprehensive reform programme that includes roughly €10 billion in annual income-tax relief for lower and middle-income earners, set to start on Jan. 1, 2027. The package also proposes a pension system overhaul, stricter sick-leave rules and measures to reduce bureaucratic burdens.

Finance Minister and Vice Chancellor Lars Klingbeil said the tax relief will be financed mainly by increasing the surcharge on top incomes, adding that “the highest earners in this country will therefore take on a larger share” of the burden.

Chancellor Friedrich Merz told a Berlin news conference that the government is “under pressure from many sides” and that the reforms aim to address structural weaknesses in economic growth, cut red tape and support companies facing high energy costs and international competition.

Among the labour changes, the pandemic-era telephone sick-note option will be abolished, requiring a doctor’s certificate from the first day of illness, and the maximum length of fixed-term contracts without cause will be doubled to 48 months. Corporate reporting obligations will also be reduced.

On pensions, the coalition pledged to implement all 33 recommendations of the government-appointed pension commission, with legislation due by year-end. The plan links the retirement age to life expectancy after 2031, potentially raising it beyond the current ceiling of 67.

Deutsche Bank senior economist Marion Muehlberger described the announcement as “one of Germany’s biggest reform packages in decades” and said it should improve sentiment and support a forecast of growth picking up in the second half of the year.

The reforms still need approval from the Bundestag and the Bundesrat, which has warned of a possible revenue shortfall from the tax changes.