Union and SPD Agree on Reform Package After Long Wrangling

Income Tax Reform at the Centre

The biggest item in the negotiations was the reform of income tax. The coalition intends, with effect from 1 January 2027, to provide relief above all for low and middle incomes. The decisive question is that of offsetting financing: the higher the relief, the more the reform costs.

In the search for sources of revenue, according to information from the Deutsche Presse-Agentur, a rise in the top tax rate, a value-added tax increase, subsidy cuts, and savings in the budget were also under discussion. The SPD had pushed for a higher top income tax rate and a higher inheritance tax, which the Union, however, rejected.

Dispute over Offsetting Financing

The meeting at the Chancellery was regarded as the decisive round of the coalition negotiations. In the coalition committee, which sat at the Villa Borsig on the Berlin lake, the senior representatives of both parties sat together to clarify the questions that had been open for months.

On their pensions reform, the Union and SPD agree that the proposals of a commission set up for that purpose, made up of politicians and experts, are to be implemented. This is intended to stabilise the pension system in the long term without overburdening contributors.

Pensions and Health as Further Building Blocks

In parallel, the savings package for the statutory health insurance is already in the parliamentary process. It is intended to cushion rising expenditure in the health system and is regarded as a further building block of the overall package.

Observers assess the agreement as a political compromise with which both governing parties were able to preserve their respective profiles. While the SPD pushed through parts of its socio-political vision, the Union was able to avert a value-added tax increase and higher taxes on wealth.

It remains unclear for now exactly how the tax shortfalls are to be offset. Concrete proposals are expected for this on the following day. The temporal sequence of the individual reform steps has likewise not yet been conclusively settled.

Overall, according to preliminary information, the package comprises around 30 individual measures, which are to enter legislative procedures in the coming weeks and months. The coalition is thus under pressure to deliver tangible relief to citizens as quickly as possible.

With the planned relief for low and middle incomes from 1 January 2027, the government intends to reach in a targeted way those who have suffered in recent years under rising living costs and high energy prices. This is also intended to strengthen purchasing power and give the economy new momentum.