Merz unveils €10bn tax cut and pension reform package to revive German economy and counter far-right rise

The deal

After a marathon seven-and-a-half-hour overnight session, Merz's centre-right CDU/CSU and centre-left SPD coalition agreed a package they billed as a turning point. "Today is a good day for Germany," Merz told reporters in the chancellery garden. The government plans to turn the 34-point plan into law by the end of the year.

We want to get Germany back on track. Now it's clear that this is possible.

Tax and pension reforms

The centrepiece is €10 billion in annual tax cuts, fully effective by 2028. A working family of four with a taxable income of €60,000 would save more than €600 a year, funded by raising the top marginal tax rate to 47% for incomes above €280,000 (with a 45% bracket from €250,000). The creaking pay-as-you-go pension system will be overhauled following an independent commission's recommendations: a gradual retirement age increase in line with life expectancy and a new capital-markets pillar.

In strategically important areas such as infrastructure or defence, we will focus on European production, our position is clear: We want open trade. But we will not accept others who do not play by the rules.

Labour market and red tape

Among the most contentious measures, employees will lose the right to obtain sick notes by telephone and must present a medical certificate from day one, scrapping the current three-day grace period. Companies will be able to offer fixed-term contracts of up to 48 months for new hires through to 2030 and will face fewer hurdles when dismissing very high earners. Sunday opening hours for bakeries and cafés will be extended, and tax incentives for public-holiday work will rise. Bureaucracy is targeted too: federal ministry staffing is to be cut by 8% through digitisation.

We know this is a tough decision. But we can no longer afford this competitive disadvantage caused by prolonged absences from work.

Political gamble

The coalition is deeply unpopular. Only 12% of Germans say they are satisfied with the government, and the AfD leads national polls, with an even stronger lead in two eastern states holding elections in September. Merz openly hopes that delivery will lift his poll numbers. "I expect that as soon as it becomes clear that we are staying on the right track, public approval will rise," he said.

One is tempted to shout, 'Finally!' It took a year, but the 'summer of reform' has arrived.

Economist Holger Schmieding called the package "a lot of small steps" that, together with welfare reforms, could "add up to major progress". Legislation is expected to reach parliament by year-end, setting up a test of whether the political centre can still deliver.