The German coalition government of Chancellor Friedrich Merz announced on 2 July 2026 a 34-point reform programme aimed at reversing economic stagnation. The package, titled “Programme for Recovery and Employment,” includes income tax cuts worth €10 billion annually, a gradual increase in the retirement age beyond 67, and a requirement for a doctor’s certificate from the first day of illness. According to the government, the measures will boost competitiveness, reduce bureaucracy, and protect the welfare state.

According to the coalition, the tax relief is concentrated on low- and middle-income families, with a working family of four earning €60,000 set to gain over €600 per year from 2028. The cost is partly offset by raising the top income tax rate to 47% for earnings above €280,000 and increasing the flat tax on mini-jobs. Labour market changes include extending the maximum period for fixed-term contracts without cause to 48 months and allowing up to six renewals. The government also plans to cut federal administrative staff by 8% and reduce corporate reporting obligations. In a move aimed at reducing absenteeism, employees will no longer be able to obtain a sick note by telephone; a medical certificate will be required from the first day of absence.

Reactions from economic institutes in Germany are cautious. Clemens Fuest, president of the Munich-based Ifo Institute, described the growth effect as “positive but small,” noting the absence of public spending cuts. Moritz Schularick of the Kiel Institute for the World Economy said the impact would be “near zero” without significant deregulation. Marcel Fratzscher of the DIW institute called the package “a symbolic package, not a great success.” However, Deutsche Bank senior economist Marion Muehlberger termed it “one of the biggest reform packages in decades,” and Berenberg’s Holger Schmieding said it could “make a real difference” when combined with the earlier pension reform proposal. Business associations welcomed the direction, while the IG Metall trade union condemned the labour measures as “an attack on workers’ rights.”

The reforms come as Germany’s export-dependent economy faces high energy costs, weak investment, and trade tensions, with government forecasts of just 0.5% growth this year. The coalition, in power since May 2025, is under pressure from the far-right Alternative for Germany (AfD), which leads polls ahead of key state elections in eastern Germany in September. The government intends to pass the main elements of the package through parliament by the end of 2026. Further legislative steps are expected in the coming months, with the tax changes taking full effect in 2028.