German Coalition Agrees on Reform Package with Tax Relief and Labor Law Changes

Germany's governing coalition has reached an agreement on a significant reform package aimed at boosting the nation's future prospects. Chancellor Friedrich Merz (CDU) announced the "Program for Upswing and Employment," comprising over 30 measures designed to modernize the country. The Chancellor expressed hope that the reforms would increase public approval for the government.

The package includes tax relief for millions of taxpayers, particularly those with small and medium incomes, starting January 1, 2027. Measures involve raising the basic tax-free allowance, child allowance, and income-related expenses deduction, along with an increase in child benefits. The government estimates the relief volume at approximately ten billion euros annually. To offset these costs, the coalition plans to tighten the "wealth tax" by lowering the income threshold for the 45 percent tax rate to 250,000 euros and increasing it to 47 percent for incomes above 280,000 euros. Notably, inheritance and wealth taxes will not be raised.

In labor market reforms, the controversial telephone-based sick note will be abolished. Employees will now be required to submit a medical certificate from the first day of illness. Penalties for issuing incorrect certificates will be increased. The duration for fixed-term employment contracts without a specific reason will be extended to a maximum of 48 months, with up to six possible renewals, effectively doubling the current limit for employees hired until the end of 2030. Additionally, provisions are being made for high earners to terminate employment with severance pay.

The coalition also aims to reduce bureaucracy and prevent the nationalization of private housing stocks by state governments. Further details on specific measures, such as the increase in the flat tax rate for minijobs from two to five percent and the reduction in the tax deductibility of craftsperson services, were also outlined. The reform package seeks to address economic stagnation and improve employment conditions across Germany.