The governing coalition in Germany, led by Chancellor Friedrich Merz, announced this Thursday, after prolonged negotiations between the CDU/CSU and SPD, a package of 34 measures aimed at boosting economic activity and the labor market, as well as strengthening social and intergenerational cohesion. The plan includes an annual tax relief of 10 billion euros, a deep reform of the public pension system, initiatives to cut bureaucracy, greater flexibility in temporary contracts, stricter control of sick leave, and actions to tackle fraud in social benefits.
"It is a good day for Germany," Merz proclaimed at the opening of the press conference where he detailed the package, with which the Executive wants to guarantee the viability of the welfare state, reactivate economic growth, and ensure that "Germany gets back on track."
"We are embarking on a journey into the future (...) This applies to older generations, but also, and above all, to younger generations," added the chancellor, emphasizing the intergenerational focus of the project.
After announcing last week its support for the 33 recommendations made by an expert commission to ensure the sustainability and intergenerational equity of the pension system, including linking the legal retirement age to life expectancy and introducing capitalization components through a fund that will invest in the markets, the coalition has now presented additional measures focused on lightening the bureaucratic burden on citizens and companies and strengthening the country's competitiveness.
In the tax chapter, the plan foresees reducing the tax burden on taxpayers for income tax from January 1, 2027, by increasing the general tax-free allowance and the tax-free allowance per child, improving family benefits per child, increasing the overall deduction for employees, and adjusting the tax brackets, shifting the maximum marginal rate to the right.
"The priority is focused on middle and low incomes. The relief is designed in such a way that it has a greater impact on families with children; with this, the coalition specifically facilitates the daily lives of families," states the document outlining the 34 measures.
With the full implementation of the reform starting in 2028, a working family with two children and joint taxable income of 60,000 euros per year will enjoy relief of more than 600 euros annually compared to the current situation. In total, the volume of the tax cut will be around 10 billion euros per year.
To compensate for the decrease in public revenue, the Government will mainly reform the "rich tax," setting a rate of 45% for incomes from 250,000 euros and 47% from 280,000 euros, and raising the levy applied to so-called Mini-Jobs from 2% to 5%.
In the labor field, one of the key measures is the possibility of resorting to temporary hiring without objective cause for workers hired until December 31, 2030, with a maximum duration of 48 months and up to six extensions, in addition to allowing new initial hiring with the same employer.
Along with the expansion of temporary contract options, the extension of Sunday opening hours for bakeries, pastry shops, and libraries will also be implemented, as agreed in the coalition contract.
Likewise, medical leave by telephone is abolished and penalties for the improper issuance of certificates of incapacity for work are tightened.
"Sickness absenteeism rates, which soared during the pandemic, have not decreased," indicated Merz, who argued that, although it is a tough measure, Germany cannot afford "this competitive disadvantage derived from long absences in companies."
On the other hand, the Ministry of Labor and the Ministry of the Interior will present a specific action plan in July to pursue fraud in social benefits, which will include the broadest possible data exchange between all competent authorities.
"Regarding the reduction of bureaucracy: data protection, so important, has itself become a bureaucratic monster," stated Merz, which is why the Executive will simplify both the regulations and the data protection rules themselves with the aim of gaining administrative agility.
The Government's action plan also addresses the housing crisis. Among the decisions adopted is the creation of a public construction company whose mission will be to promote the construction of new homes in the affordable price segment where the real estate market does not guarantee sufficient long-term housing supply.
This new entity must prioritize the construction of social housing, operating mainly in areas with a proven shortage of apartments. At the same time, in order not to jeopardize private development, it will be established by federal law that it will no longer be possible to nationalize large private rental housing portfolios through socialization regulations approved at the regional level.
"We know that you, citizens of our country, want decisions and not disputes. And that is exactly what we have offered," Merz remarked, perceiving in the citizenry "a great willingness to make firm decisions and to embark on a new beginning."
"Our country can do more and wants more," the chancellor concluded.
Weak economic forecasts for Germany
In June, the Bundesbank lowered its forecast for German GDP growth this year to 0.5% and to 0.8% for 2027, compared to December estimates, when it anticipated an expansion of 0.6% and 1.3%, respectively. For 2028, the institution chaired by Joachim Nagel forecasts growth acceleration to 1.4%.
In parallel, the central bank raised its projection for harmonized inflation this year to 2.9%, compared to 2.2% calculated in December, and expects the increase in the cost of living in 2027 to be 2.7%, above the previously forecast 2.1%. Thus, inflation would remain at relatively high levels until 2028, when the Bundesbank calculates it will fall to 1.9%.
Previously, the German Institute for Economic Research (DIW) had already revised its GDP growth forecast for Germany downwards, also placing it at 0.5%, half of what it projected in April, and reducing its forecast for 2027 to 0.8%, from the previous 1.4%.
Regarding price trends, the DIW now forecasts that inflation in Germany will reach 2.9% in 2026, half a percentage point more than calculated in the spring, and that next year prices will increase by 3%, compared to the previously estimated 2.3%.
At the end of June, the Munich Economic Research Institute (Ifo) confirmed its forecast for German GDP growth this year at 0.8%, but cut its estimate for 2027 to 0.8%, four tenths less than in March.
Regarding inflation, the latest Ifo projections point to a rate of 2.9% this year and 2.7% next year, both above previous forecasts, which were 2.2% and 2.3%, respectively.