European Economic Comment "Germany: A significant reform package - first..."

Research evidence excerpt

European Economic Comment "Germany: A significant reform package - first..."

government's ability to act, which

had been subject to doubt in recent months. Hence, it is a very positive step that can

improve the overall business sentiment, even without fundamentally changing the long-

run outlook. We caution that all measures still need to pass the Bundestag during a

politically challenging H2 2026.

The key measures in detail

On pensions, the government aims to fully implement the recent proposals presented by

a commission (hence, this is not news), implying a gradual rise in the retirement age,

phasing out of early retirement options and introducing a capital funded pillar. Most

observers we spoke to in Berlin last week noted that the pension package, if passed,

would be a meaningful signal. As regards taxes, the government will lower income taxes

for lower- and middle-income households (e.g. through higher basic and child

allowances, and flattening of the income tax progression) that will result in annual tax

reductions of €600 for an average household (from 2028 onwards). These tax cuts have

an overall estimated cost of €10bn (0.2% of GDP), but are planned to be fully financed

by increasing taxation for higher income households (including by introducing a new tax

bracket for incomes >€280k that will be taxed at 47%). Corporate taxation will not be

changed beyond the gradual decline in tax rates from 2028 onwards that had been

decided last year. The main measures on the labour market are to increase flexibility.

Specifically, temporary work contracts could now be extended 6 times (up from 3 times

currently) and be used for a total of up to 4 years (up from 2 years currently); this

measure is limited until end-2030. Also, employment protection will be eased for higher