German Coalition Locks in €10 Billion Tax Cut and Higher Rich Surcharge as Part of 34-Point Labour Market Reset
02.07.2026 - 19:33:20 | boerse-global.de
Germany’s ruling coalition of the Union and the Social Democrats agreed Wednesday on a sweeping reform package containing 34 separate measures that touch nearly every corner of the country’s labour market and tax system. The deal, hammered out after months of internal wrangling, aims to boost employment flexibility while offering targeted relief to low- and middle-income households – but union leaders have already declared a full-scale fight.
Progressively higher tax rates will take effect from January 2027. The top marginal rate jumps to 45 percent for annual taxable income above €250,000 and to 47 percent for earnings exceeding €280,000. That additional revenue helps finance an annual tax cut worth roughly €10 billion, with the heaviest benefits flowing to families on modest incomes. A household with two children and a gross annual income of €60,000 will save up to €600 per year. Child benefit is scheduled to rise in steps to €272 per child by 2028.
The coalition’s labour-market changes are the most contentious piece of the accord. Fixed-term contracts without a specific justification can now last up to 48 months – double the previous maximum. Until the end of 2030, employers may also renew such contracts as many as six times. Chancellor Friedrich Merz and Bavarian premier Markus Söder described the change as a long-overdue removal of red tape that had been hampering hiring.
Dismissal protection is also being loosened for top earners. Workers earning roughly €15,000 per month or more will face weaker safeguards, and anyone who quickly switches jobs will receive tax-advantaged treatment on severance payments in a bid to increase labour mobility.
Unions responded with blistering opposition. IG Metall chairwoman Christiane Benner called the proposals an outright attack on workers’ rights. Frank Werneke, head of the Verdi service union, argued that expanding fixed-term contracts would not generate growth but merely shift risk onto employees. DGB federation president Yasmin Fahimi dismissed the cuts as unnecessary.
A separate health-related measure has also stirred anger. The coalition is scrapping the option of telephonic sick notes – meaning employees must now present a doctor’s certificate from the very first day of illness. The German Association of General Practitioners termed the plan catastrophic, while the National Association of Statutory Health Insurance Physicians and the AOK health insurance fund added their own warnings about administrative overload.
Benner called the sick-note rule “unsocial” and Werneke deplored what he described as a general distrust of workers. The Social Welfare Association of Germany (Sozialverband Deutschland) said the changes would erode the overall level of protection.
Economists are split on whether the 34 points will deliver a real jolt to the economy. DIW president Marcel Fratzscher dismissed the package as merely a symbolic gesture lacking punch. In contrast, “economic wise man” Gabriel Felbermayr called it a comprehensible compromise and welcomed the removal of dismissal hurdles for high-salaried employees. IW director Michael Hüther expects positive growth effects but stopped short of endorsing the plan as the optimal route. Employers’ Federation president Rainer Dulger praised a “long-overdue change of course” – the first genuine flexibilisation of labour law in decades. The BDI industry association cautioned that 34 points alone could not constitute a far-reaching economic turnaround.
The reform bundle also includes measures to cut bureaucracy – simplified reporting duties and streamlined tax declarations – although an overhaul of the Working Hours Act was left for later. From 2027, bakeries will be permitted to stay open longer on Sundays. The dbb civil servants’ union harshly criticised a parallel plan to slash eight per cent of positions in the federal administration.
Union leaders said they would mobilise their members against the labour-market changes. “This package is an attack, and we will fight it with everything we have,” DGB’s Fahimi told reporters after the coalition announcement.
