It’s a wrap - agreement on substantial reforms

Research evidence excerpt

It’s a wrap - agreement on substantial reforms

Deutsche Bank

Research

Europe Economics Date

Germany 2 July 2026

Germany Blog

It’s a wrap - agreement on substantial

reforms

Marion Muehlberger

Overnight, the German government agreed on one of the biggest reform packages

Senior Economist

of the past decades, spanning from (moderate) income tax reform, to pension +49-69-910-31815

reform and more flexible labour laws to cutting red tape.

Ursula Walther

Research Associate

The government has not only delivered one of its key electoral promises – tax relief

for low and middle-income earners. It has also demonstrated its ability to agree on

important structural reforms by moderately raising the pension age, introducing

more flexibility in labour laws (key for start-ups), and reducing the administrative

burden on companies.

The reform package shows that both coalition partners are willing to compromise.

They have set themselves another clear deadline for implementing these structural

reforms by year-end at the latest. This should bode well for sentiment and dovetails

with our forecast that growth will pick up in the second half of the year.

Key elements of the agreed reforms

Below, we provide some more details on the four key elements of this reform

package:

n Moderate tax relief for households from January 2027 onwards - EUR 10

bn relief with limited fiscal impact. The extent of tax relief falls short of

previous promises (see our note here), but will still be around EUR 600 per

annum for a family with two kids and a taxable income of EUR 60,000. The

tax relief was downsized to EUR 10 bn in total, as it had to be fully funded

which means that the fiscal impact will be limited (see our recent fiscal

tracker). The compromise found includes (i) an increase of the basic tax-free