The Merz plan on pensions and taxes to make Germany grow

Pensions and taxes: these are the most important chapters of the reform package presented by governor of Friedrich Merz to make Germany grow. In addition to raising theretirement age (over the course of 15 years it will go from 67 to 67.5 years), the chancellor has presented tax cuts for 10 billion euros for the middle class, with the aim of lifting Europe’s largest economy out of stagnation and strengthening support for its coalition government.

Under the new measures, a family with two children earning 60,000 euros a year will receive more than 600 euros in annual tax relief. The relief will be financed by increasing themaximum marginal rate for the highest incomes from 45% to 47%. “We are working to reduce bureaucracy. We are working to protect our welfare state and to lighten the burden on workers and businesses through tax cuts,” said Merz, who had promised “a big leap forward” for Germany’s economic growth.

Labor market reforms

Merz’s Christian Democrats and their coalition partners social democrats They also agreed on a series of labor market reforms, including the extension of Sunday opening hours for bars and bakeries, the expansion of tax incentives for employees working on public holidays and the possibility for companies to hire workers on fixed-term contracts lasting up to eight years. The package follows tense negotiations and marks a new truce within Merz’s coalition.

 Slashing red tape, labor‑market changes, tax reform, and extended Sunday opening hours for bakeries and libraries — the German government has unveiled a package of reforms to kickstart the economy.

Chancellor Merz believes: the country is ready to embrace them. pic.twitter.com/bMn9h7Yx5o

— DW Politics (@dw_politics) July 2, 2026

In Germany there will be a stop to sick certificates by telephone

The package provides an income tax reduction worth 10 billion eurosfinanced by an increase in taxation on those earning more than 250,000 euros per year. Furthermore, changes to the pension system will, over time, lead to an increase in the retirement age beyond 67 years old.

“Taxpayers with higher incomes will shoulder a greater share of the tax burden,” said the Finance Minister and Vice-Chancellor Lars Klingbeil (SPD). “It is a fair measure, so that our country can move forward.” According to the governing parties, the tax cut will allow an average family to have around 600 euros more per year.b The coalition also agreed to reduce reporting obligations for companies, considered excessively onerous, and to abolish the possibility for workers to obtain a medical certificate by telephone, with the aim of reducing the days of absence due to illness.

Facilitated dismissals and tensions in the coalition

The government also plans to make it easier to lay off higher-paid employees, a move aimed at attracting start-ups in high-income sectors like that of biotechnology. A government source told the FT that the tax cuts are less ambitious than initially expected, but described a “significantly improved working climate” within the coalition compared to the start of the year. At the heart of that dispute was the promise of tax relief for low- and middle-income families. Merz had then come close to an agreement with the Vice-cancellation and co-leader of the SPD Lars Klingbeil on a compromise that provided for tax cuts of up to 27 billion euros. But leading exponents of CDU they had opposed financing the measures through a tax increase on higher incomes, fearing a negative reaction from the family business owners who make up the German Mittelstand.

The next elections in Germany

Important regional elections will be held in September in the states of former East Germany, where the AfD could win the leadership of a Land for the first time. It would be an unprecedented event in post-war Germany and would further highlight Chancellor Merz’s low level of approval. “We are doing everything we can to overcome the structural weaknesses of our country in terms of economic growth,” Merz said, admitting that “we are under pressure from many fronts.” For years, Germany’s export-oriented industry has been the engine of the country’s economic success, but today it is suffering from rising energy and labor costs. Added to this are growing Chinese competition and the US president’s aggressive trade policy Donald Trumpwith its continuous duties. In a measure interpreted as aimed primarily at China, the coalition announced that the government will push at the level ofEuropean Union for tougher measures against “unfair competition” and for stricter rules on foreign investment in “strategic sectors and critical infrastructure”.

Second Marion Muehlbergersenior economist at Deutsche Bankthe announcement represents “one of the most important reform packages of recent decades” and demonstrates the government’s ability to reach agreement on relevant structural reforms. In his opinion, the plan “should strengthen confidence and confirms our forecast of a recovery in growth in the second half of the year”. More cautious Holger Schmiedingeconomist of Berenbergaccording to which “none of the numerous reforms will be revolutionary taken individually.” “However, together with the major pension reform already approved by the government ten days ago, this agreement can really make a difference. If implemented, Germany can once again become a more attractive place for investments and job creation.” More critical Marcel Fratzscherpresident of the economic institute I saidthan to the daily newspaper Rhenish Post he declared that the measures do not represent “a great success, but rather a package of symbolic value”.