German coalition reaches broad tax and economic reform deal

Germany’s coalition government announced a wide-ranging package of tax, economic and bureaucratic reforms on Thursday, presenting it as a decisive push to revive Europe’s largest economy and rebuild public confidence after months of weak poll numbers.

Chancellor Friedrich Merz said the agreement between his Christian Democrats (CDU/CSU) and their Social Democrat coalition partners aims to deliver relief to employees and businesses through lower taxes and reduced red tape.

“The coalition I lead is demonstrating that we possess the strength and the determination to lead Germany into the future,” Merz told reporters. “We are ensuring greater agility for our businesses. We are reducing bureaucracy. We are safeguarding our social welfare system, and we are easing the burden on employees and businesses alike by cutting taxes,” he said.

Under the measures agreed by the coalition partners, the reforms would provide income tax relief to low- and middle-income families with children. A working family with two children and a taxable household income of €60,000 ($68,500) would receive more than €600 ($685) a year in tax relief compared with today.

The total relief from the reform is expected to amount to around 10 billion euros per year. Funding is intended to come primarily from higher taxes on the wealthy. The tax rate would rise to 45% on taxable income of €250,000 ($285,000) and above, and to 47% on income of €280,000 ($320,000) and higher.

To cut bureaucracy and improve business conditions, the deal would scrap mandatory reporting requirements to state authorities across the board. Only requirements explicitly justified by the responsible ministries—or reaffirmed in ministerial regulations with a stated rationale—would remain.

New sick leave rules

In response to high employee absenteeism, the rules for sick leave would be tightened. Employees would need to provide a doctor’s certificate from the first day of illness, rather than only from the fourth day under current rules.

Chancellor Merz, who repeatedly argued that sick leave rates in Germany are excessively high, said the flexible sick-leave arrangements introduced during the COVID-19 pandemic can no longer remain in place because they undermine the competitiveness of German businesses.

“We are eliminating the practice of issuing sick leave over the phone and will require employees to submit a medical certificate of incapacity for work from the first day of illness,” Merz told reporters. “We know this is a tough decision, but we can no longer afford the competitive disadvantage caused by prolonged absences in companies,” he said.

The coalition’s reform package, aimed in particular at improving the business climate, would also loosen working-time rules in some sectors, allowing bakeries and pastry shops to extend their Sunday opening hours.