Germany unveils sweeping reform package

On Thursday, 2 July 2026, Chancellor Friedrich Merz’s ruling coalition announced a comprehensive economic reform package aimed at revitalising Germany’s growth trajectory. The centerpiece is an annual €10 billion tax relief for low‑ and middle‑income earners, which will be financed primarily by increasing the top marginal income‑tax rate from 45 % to 47 % for individuals earning €280,000 or more per year.

The reforms also encompass several structural measures: adjustments to the pension system, new affordable‑housing initiatives, an action plan to combat benefit fraud, the abolition of the practice allowing workers to obtain sick‑notes by telephone, and a target to reduce staffing in federal ministries by 8 % through digitisation.

Deutsche Bank senior economist Marion Mühlberger commented that the government has delivered on a key electoral promise—tax relief for low‑ and middle‑income households—while also securing agreement on pension and labour‑law flexibility. He noted that the package demonstrates coalition compromise and that its implementation by year‑end should bolster market sentiment and aligns with Deutsche Bank’s forecast of a growth pickup in the second half of the year.

The reform agenda comes as the German government faces pressure to reverse a sharp slowdown; earlier in the year it halved its 2026 growth forecast to 0.5 % and lowered the 2027 projection to 0.9 % from a previous 1.3 % estimate. Concurrently, inflation forecasts were raised as energy prices continued to climb, driven initially by the war in Ukraine and more recently by the conflict involving Iran, which together have heightened competition from China and increased export‑related pressures.

Key figures

  • €10 billion annual tax relief for lower‑income earners.
  • Top income‑tax rate increased to 47 % for earnings above €280,000.
  • 8 % reduction target for federal ministry staff via digitisation.
  • 2026 GDP growth forecast cut to 0.5 %; 2027 forecast to 0.9 %.
  • Inflation outlook raised due to rising energy costs.

Implications

The package is positioned as a catalyst for improved sentiment and a potential rebound in economic activity in the latter half of 2026, while also addressing fiscal sustainability through targeted tax adjustments and efficiency gains in the public sector.