Coalition Reform Package 2026: 34 Measures to Tackle Germany's Growth Problems

Background: Germany's Pressing Growth Problems

Germany has been battling sluggish economic growth, a heavy tax and social contribution burden, and a worsening skilled-worker shortage for years. The pressure on the current coalition of CDU/CSU (Union) and SPD to deliver tangible improvements is considerable. The result of 7.5 hours of negotiations in the coalition committee: a package of 34 concrete measures, presented on the morning of July 2, 2026, in the courtyard of the Federal Chancellery.

Core problem: Many of the agreed measures still lack complete implementation details. The real test lies in translating them into law — a process that, by German experience, can be protracted.

Tax Relief from 2027: What Changes Specifically

The most immediately tangible changes concern income tax — effective January 1, 2027:

• Basic tax allowance raised (more tax-free income for all taxpayers)
• Child tax allowance and child benefit increased (direct financial relief for families)
• Employee flat-rate deduction raised (less administrative burden when filing tax returns)
• Flattening of the second progression zone: especially those on low to middle incomes benefit
• From 2028: A further relief stage is planned

The New Split Model for High-Income Tax

At the same time, taxation of very high incomes is being restructured:

This split model is designed to enable more differentiated taxation — a compromise between the demands of both coalition partners, though one that introduces new layers of tax complexity.

Pension Reform: Commission Recommendations Become Law

Another central element is pension reform. All 33 recommendations from the Commission on Old-Age Security are to be implemented in full. Passage through the Bundestag is planned by the end of 2026. What this means in concrete terms for future pension benefits and contribution rates depends heavily on the details of the implementing legislation.

Labour Market: More Incentives, Less Flexibility

In the labour market, the package takes two distinct approaches — with notably contrasting effects:

• Higher Sunday and public holiday supplements: Stronger financial incentives for workers to take on shifts at unsociable hours
• End of phone-only sick notes: The so-called "Tele-AU" is being abolished — workers will once again need to visit a doctor in person

The latter measure is likely to spark considerable debate. Telephone sick certification had become a practical convenience for many working people and had helped reduce pressure on GP practices. Whether the return to mandatory in-person visits actually reduces absenteeism or merely places a greater burden on genuinely ill workers remains contested.

Further Areas of Reform

The package also covers a broad range of additional topics:

• Cutting red tape: Simplifying administrative procedures for citizens and businesses
• Digitisation: Investment in digital infrastructure and modernisation of public administration
• AI promotion: Strengthening artificial intelligence as an economic and innovation driver
• Data protection: Adjustments as part of the digital transformation
• Housing construction: Measures to address the ongoing shortage of affordable housing
• Corporate law: Easing regulations, particularly for small and medium-sized enterprises

Assessment: Bold Reform or Too Little, Too Late?

The reform package is a political compromise — and like all compromises, it has strengths and weaknesses. The tax relief measures are concrete and time-bound. The pension reform follows the advice of independent experts. But whether 34 measures are sufficient to sustainably resolve Germany's structural growth problems remains to be seen.

Associations, economists, and opposition parties will be watching implementation closely in the months ahead. The real benchmark is not the package as agreed — but what actually reaches citizens and businesses in the end.