Black-Red Coalition Negotiates Billion-Dollar Reform Package Before Summer Break

At the center is an income tax reform that is to come into force on January 1, 2027. Finance Minister Lars Klingbeil had submitted two variants to the coalition leaders as a basis for negotiations: a smaller relief amounting to roughly ten billion euros and a larger model of about 25 billion euros. Concrete details were not initially published. According to the coalition, small and medium incomes between 2,500 and 3,000 euros gross per month are to benefit in particular.

Pensions: Merz and Bas Want to Implement Commission Proposals

Until the last minute, the question of how to finance the package remained contentious. The SPD is pushing for a higher top income tax rate, a higher inheritance tax, and an increase in the so-called wealth tax. The Union rejects higher burdens on high incomes and large estates. Also under discussion are an increase in value-added tax, whose regular rate currently stands at 19 percent, as well as subsidy cuts and savings in the federal budget. CDU Secretary General Carsten Linnemann had recently signaled willingness in the ARD program "Bericht aus Berlin" to talk about the wealth tax. Raising the regular VAT rate by one percentage point would, according to estimates, bring an additional roughly 16 billion euros into the state coffers. There is also talk of lowering the VAT rate on food to zero percent.

On pensions, Merz and Bas announced their intention to implement the proposals of the Pension Commission swiftly and in full. The commission, with the participation of SPD social policy politician Klose, had presented 33 recommendations the previous week. These provide for gradually longer working hours, a new capital-funded pillar and a stabilization of the pension level. The key points of the reform are to be adopted by the cabinet before the summer break. The necessary laws are to be drafted by the end of the year.

Social Minister Bärbel Bas stated, however, that she would prefer not to touch the issue, especially as stiff resistance is coming from the trade unions. DGB Chair Yasmin Fahimi criticized the government's pension plans as unrealistic: "Ich halte es für absolut unrealistisch zu glauben, man könnte eine gute Rente für alle sicherstellen, ohne die Verteilungsfrage offen zu stellen." The SPD itself had also agreed in the coalition contract to create the possibility of a weekly rather than daily maximum working time.

Eight-Hour Day Remains a Disputed Issue

According to information from the Deutsche Presse-Agentur, a draft for a minimum solution was already available in the Labor Ministry in mid-June. According to this, exceptions from the eight-hour day should only be possible if they are negotiated in collective or company agreements. Electronic time recording is to become mandatory. There was fierce opposition from the CDU and employer associations. The eight-hour day has existed in Germany for over 100 years. At the EU level, the federal government is likewise pushing for relief, as many requirements come from Brussels.

Care: Coalition Looks for Further Spending Brakes

The signs point to continued conflict on care. Unlike statutory health insurance, long-term care insurance covers only part of the costs, which is why those in need of care must pay ever higher personal contributions. The coalition contract had promised a cap. Now, however, further spending brakes are coming into view, for example with regard to pension contributions for caregiving relatives, classification criteria for care grades, and relief surcharges for nursing home residents. Federal Health Minister Nina Warken (CDU) had presented an initial draft in early June that provided, among other things, for higher hurdles for classification into a care grade and a slower increase in subsidies for nursing home care costs. The draft met with sharp criticism from the federal states, the patient commissioner and the care insurance funds. The Bundestag is expected to deal with the care reform only in autumn.

Health Reform Before Bundestag Vote

The health reform has progressed the furthest. Minister Nina Warken warned in the Bundestag that the statutory health insurance funds were facing a deficit of 19 billion euros next year, which could grow to around 44 billion euros by 2030. The financing gap at the statutory funds for 2027 has recently grown further. The declared goal is to pass the austerity law in the Bundestag next week. The Bundestag factions of the Union and SPD are already wrestling over the billions in cuts, which are intended to prevent even higher health insurance contributions, in the parliamentary process.

Bureaucracy reduction is also part of the package. The coalition intends to noticeably cut red tape – business associations regularly cite excessive bureaucracy as a drag on growth. Planning and approval procedures are to be accelerated, reporting obligations reduced, visits to authorities digitized. Government spokesperson Stefan Kornelius had announced a "großes Paket." Klose said on Deutschlandfunk: "Nicht nur auf kleinsten gemeinsamen Nenner kommen." In his assessment, agreement had already been reached on many pension points, whereas on tax reform and the eight-hour day it remained difficult.

Bureaucracy Reduction and Further Topics

Further topics of what may be the last meeting of the coalition committee before the summer break are changes to parental allowance (Elterngeld), a BAföG increase and electoral district reform. On electoral district reform, which was agreed in the coalition contract, the Union and SPD have recently made no progress. The SPD's demand for parity – according to which the Bundestag should be made up half of women and half of men – meets with rejection in the Union.

Klingbeil has largely completed his budget draft for 2027; it is to be adopted by the cabinet next Monday. Federal Chancellor Merz expressed confidence on Wednesday midday: "Meine Erwartung ist, dass wir wirklich einen großen Sprung nach vorne machen in der Modernisierung unseres Landes." There would, however, not be "einen großen Big Bang." SPD parliamentary group manager Dirk Wiese had stated in advance that the coalition partners were agreed "die Pläne über die Ziellinie zu bringen." Tanja Gönner, chief executive of the Federation of German Industries (BDI), warned: "Die wirtschaftliche Lage ist zu ernst, um weiter Zeit zu verlieren."

Manuela Schwesig, Minister-President of Mecklenburg-Vorpommern (SPD), had raised objections; state elections are due in her state in September. The municipalities also raised the alarm over looming additional social spending. In negotiating circles, talk was of some 30 points on which the coalition partners had already agreed in the preparatory days.

On the margins of the meeting, the cabinet also adopted two draft laws to strengthen the Bundeswehr. The laws concern the accelerated construction of military infrastructure and the strengthening of the reserve. Reservists are to be able to be required to take part in exercises again in future. Special provisions in property and environmental law are to be introduced for the Bundeswehr's construction projects. NATO Secretary General Mark Rutte attended the meeting as a guest.

The reform package is regarded as the coalition's key domestic policy project. The aim is to get the economy moving again and to make the social security systems fit for the future. Klose, however, dampened expectations of rapid implementation: only one sitting week of the Bundestag remains before the summer break. What can become law in that single week is limited. ZDF correspondent Andrea Maurer formulated: "Bei diesem 'ganz großen Paket' seien die Koalitionäre 'zum Gelingen verdammt'." By Thursday morning, Maurer said, she did in fact expect initial decisions.

Bundeswehr: Cabinet Adopts Two Draft Laws

According to the assessment of economic experts, the reform decisions could also have an impact beyond Germany's borders. Austria, for example, is watching the economic impulses from the neighboring country with great interest; the reforms could bring new momentum for the Austrian market and domestic exporters. (dpa, Reuters)

In terms of content, the coalition leaders agreed, according to information from negotiating circles, that the reforms are to be implemented in several steps. The necessary pension laws are to be drafted by the end of the year. SPD party and parliamentary group leader Bas had named a concrete relief target of 500 euros per year. Federal Finance Minister Klingbeil described the tax reform as the largest single item in the package. The DIHK executive board, under Melnikov, warned that raising the top income tax rate would hit retail, family businesses and industrial suppliers in particular.

Not least because of the tight timeline before the summer break, several projects initially remained only as framework provisions. This applied in particular to the care reform, whose parliamentary deliberations are not to begin until autumn, as well as to electoral law. Klose said on Deutschlandfunk that the pension commission could serve as