Chancellor Friedrich Merz's governing coalition unveiled a sweeping package of tax, labour and pension reforms on Thursday aimed at reviving Europe's largest economy and blunting the rise of the far-right Alternative for Germany. The "Programme for Revival and Employment," agreed after marathon talks between Merz's Christian Democrats and their Social Democratic partners, bundles 34 measures — roughly €10 billion ($11.4 billion) a year in income tax relief for lower and middle earners, a gradual rise in the retirement age, tighter sick-leave rules and cuts to federal bureaucracy.
The tax relief, effective from January 1, 2027 and reaching full size by 2028, is aimed squarely at working households: a family with two working parents, two children and €60,000 in taxable income would keep roughly €600 more a year. It is financed largely by raising the top rate of income tax from 45 to 47 percent for those earning €280,000 or more — a redistribution the coalition's left flank demanded and one the AfD's co-leader Alice Weidel promptly dismissed as "left-wing redistribution" without substance.
The pension changes carry the biggest long-term weight. Adopting the recommendations of a government-mandated expert commission, the coalition will link the retirement age — currently rising toward 67 — to life expectancy after 2031, a mechanism that could push it toward 70 over coming decades. The stated aim is to stabilize pension levels without a punishing rise in the payroll levy as the baby-boom generation retires; 21 million pensioners just received a 4.24 percent increase on July 1.
Employers won concessions that unions had resisted for years. The telephone sick note is abolished: workers must produce a doctor's certificate from the first day of absence, ending rules that allowed up to three days without documentation. Maximum fixed-term contracts without stated cause double to 48 months, and corporate reporting obligations shrink, alongside an 8 percent cut in federal ministry staffing to be achieved through digitalization.
The economic backdrop explains the urgency. The government in April halved its 2026 growth forecast to 0.5 percent — dampened in part by fallout from the Iran war — and trimmed 2027 to 0.9 percent, after two years of outright contraction. "We want to get Germany back on track," Merz said, adding: "We're setting out into the future. We're strengthening ourselves so that we can live well in these new times."
The politics are as pressing as the economics. The coalition, in office just over a year, has been punished in polls for public infighting, and the AfD's strength ahead of September's eastern state elections has rattled both governing parties. Merz acknowledged the government is "under pressure from many sides."
Nothing takes effect automatically. The Bundestag must approve the measures, and the income tax changes also need the Bundesrat, where states have already warned about revenue shortfalls. Deutsche Bank Research called it one of Germany's most significant reform packages in decades and predicted it would lift sentiment and second-half growth — a verdict the coalition must now convert into votes, in parliament and beyond.