Germany Offers €10 Billion Tax Relief as Reforms Move Ahead

Friedrich Merz Photographer: Krisztian Bocsi/Bloomberg Photo by Krisztian Bocsi /Bloomberg

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(Bloomberg) — Chancellor Friedrich Merz’s coalition agreed on €10 billion ($11.4 billion) in annual income tax relief and a range of measures to bolster Germany’s labor market as part of a set of reforms designed to revive economic growth and stabilize the budget. 

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Merz’s Christian Democratic-led bloc and the Social Democrats reached the 34-point package after a meeting at the Federal Chancellery in Berlin on Wednesday, putting the governing alliance on track to deliver a comprehensive plan by a parliamentary summer recess that begins at the end of next week. 

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“Citizens want decisions, not infighting — and that’s exactly what we’ve delivered,” Merz told reporters in Berlin Thursday as his governing alliance overcame weeks of discord to reach a compromise. 

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The agreement gives Merz’s government a legislative blueprint for sweeping changes to Germany’s social welfare system as the coalition seeks to reverse stumbling growth and regain faltering public support. A landmark overhaul of Germany’s pension system will be completed in parliament by the end of the year, the German leader said.  

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The income-tax measure will offer a working family with two children earning €60,000 more than €600 a year in tax relief from 2028, Merz said. It’ll be partially financed with a higher rate on top earners, a move the conservatives had resisted. Incomes of €250,000 or more will be taxed at 45%, rising to 47% at €280,000, according to the plan. 

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The overall tax package would be a scaled-back version of what party leaders had been discussing. A proposal put forward by Finance Minister Lars Klingbeil saw as much as €20 billion in income-tax cuts for a broad swathe of low- and middle-income earners. 

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The agreement contained a raft of other measures, including relaxing fixed-term contract rules, scaling back bureaucracy, an 8% staffing reduction across federal administrative offices, liberalizing opening hours on Sundays and support for artificial intelligence, semiconductors, batteries and autonomous driving. 

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In an unexpected move, the parties agreed to ban attempts to nationalize real estate companies at the state level, a move that appeared to be aimed at an initiative in Berlin, where voters approved such a measure in a state referendum, unsettling international investors. 

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“We want to build apartments, not expropriate owners,” Klingbeil told reporters. 

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As Merz’s government grows more vigilant on trade with China, the government will speed up European Union anti-dumping and anti-subsidy measures, introducing preferential rules for European companies. Germany will also become more active in strategic sectors and offer investment protections to shield domestic capabilities. 

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“We can only counter unfair competition by defending ourselves against it,” Merz said when asked about China, though he didn’t name the world’s No. 2 economy. “We embrace fair competition. We must counter unfair trade practices with appropriate measures.”