Germany bets on major tax, pension and labour reforms to spur growth

German Chancellor Friedrich Merz on Thursday unveiled a comprehensive package of pension, tax, and labour reforms, accompanied by measures to cut red tape. He said the reforms would boost economic growth, job creation, and competitiveness while maintaining key social welfare protections. Merz said that the government aims to pass the main elements of the 34-point package through parliament by the end of the year. The 34 measures include income tax cuts for low- and middle-income families, a major overhaul of the ailing pension system, stricter rules on employees’ sick leave, and a reduction in the country’s burdensome bureaucracy. 34-point reform package targets taxes, pensions and bureaucracy “These reforms all have one goal: We’re setting out into the future,” Merz said Thursday, adding “We’re strengthening ourselves so that we can live well in these new times.” Merz’s coalition government of centre-right and centre-left parties took office just over a year ago with pledges to reform and revive Germany’s sluggish economy, Europe’s largest. It has since become deeply unpopular, partly due to perceptions that it has engaged in infighting but delivered little tangible progress. “From the very beginning, we set an agenda with a single goal in mind: We want to get Germany back on track. It is now clear that this is possible,” the conservative chancellor said. Merz is seeking to distance his coalition government from its negative reputation. Merz is seeking to distance his coalition government from its negative reputation. Economic revival remains a key challenge Germany’s economy returned to modest growth last year after contracting for two consecutive years. The government now forecasts subdued economic growth of 0.5% this year, a projection that has been lowered due to the fallout from the war in Iran. The country of 83.5 million people is already contending with growing competition from Chinese companies, higher energy costs triggered by Russia’s full-scale invasion of Ukraine, and challenges arising from US President Donald Trump’s tariffs and trade threats. In addition, it faces deeper structural issues such as high production costs, sluggish private investment, and increasingly expensive health and pension systems driven by an aging population. Tax relief planned for families On Thursday, coalition leaders announced that the tax cuts, once fully implemented in 2028, would deliver an annual tax relief of approximately 600 euros ($686.40) for a family with two working parents, two children, and a total taxable income of 60,000 euros ($68,640). The reform is expected to provide total tax relief of around 10 billion euros ($11.4 billion) per year. Pension overhaul linked to rising life expectancy The pension reform includes gradually raising the retirement age, currently between 65 and 67 years depending on the number of contribution years, in line with rising life expectancy. Coalition leaders said they would implement the recommendations made last month by a government-appointed panel of experts and politicians to stabilise the pension system. The goal is to prevent a decline in pension levels and avoid a significant long-term increase in the contributions paid by employees. Government proposes stricter sick leave rules The proposed changes to sick leave rules would end the practice of allowing employees to report sick for up to three days without a doctor’s visit or obtain a one-week medical certificate without being examined by a doctor. Instead, employers would be able to demand a doctor’s certificate from the first day of absence. Merz has repeatedly criticised Germany’s high rate of sick leave, saying it undermines productivity. Opposition criticises reform agenda To tackle Germany’s excessive bureaucracy, the government announced plans to eliminate various reporting and documentation requirements, reduce data protection standards to the European minimum, and ease red tape associated with filing tax returns. Alice Weidel, co-leader of the far-right Alternative for Germany (AfD) party, which came second in last year’s national elections, derided the reform package. On X, she called the measures an “even more left-wing redistribution, and minimal compromises that don’t deserve to be called ‘reforms’.” “The fact that this is being sold as a ‘breakthrough’ shows only one thing: this government’s complete inability to reform,” she wrote. Nevertheless, Merz appealed to all Germans to support the reform package. Stay informed on all the latest news, real-time breaking news updates, and follow all the important headlines in india news and world news on Zee News.