German economists say coalition's 34-point reform package falls short of reviving stagnant economy

The German government's 34-point reform package, hammered out in overnight talks between the CDU/CSU and SPD on 2 July, drew sharp criticism from the country's top economic institutes, who described it as a first step at best and called for deeper structural changes.

Economists demand more ambition

DIW president Marcel Fratzscher said the package was no more than an initial move to shift the national mindset.

The heavy reforms, which involve cutting back on vested interests, will now have to follow.

He outlined three priorities: a large public and private investment offensive, a fundamental tax reform that significantly relieves small and medium incomes as well as companies, and deeper European integration to counter what he called aggressive and nationalist hegemons in the US and China.

Ifo president Clemens Fuest called the package an important contribution but identified the absence of spending consolidation as its biggest flaw.

The biggest weakness of the reform package is that measures to consolidate government spending are missing.

He welcomed the planned ban on real-estate expropriation and labour market flexibilisation, but warned that the income tax reform would burden medium-sized partnerships with a top rate, including the solidarity surcharge, just under 50 percent.

ZEW president Achim Wambach acknowledged positive effects but stressed that high energy costs, excessive regulation and skilled-labour shortages continue to hold back companies.

To bring Germany back to the top as an investment location, further steps will be necessary.

What the package contains

The coalition agreed on tax relief worth €10 billion per year, to take effect from 1 January 2027. The reform raises the basic tax-free allowance, increases child benefit and aims to cut the burden on small and medium incomes. Finance minister Lars Klingbeil said a family with two working parents could be up to €600 better off annually. The package also includes measures to reduce bureaucracy, tighten rules on sick leave and ban the expropriation of residential property.

Low earners and opposition push back

Left-party politician Dietmar Bartsch argued that millions of low-income workers would see no benefit because they already fall below the tax threshold. He cited data from the Federal Statistical Office showing 4.58 million tax cases in 2022 where no wage tax was assessed, including more than one million in North Rhine-Westphalia alone.

BSW founder Sahra Wagenknecht dismissed the tax reform as a "mockery of the people", pointing out that €312 of the promised €600 relief comes from the child benefit increase, which she called an overdue family payment rather than a tax cut.

The tax reform is a mockery of the people.

Electoral law left for later

One major item missing from the package is electoral reform. The CSU wants to revert to the old system so that all constituency winners enter the Bundestag – 23 failed to do so at the last election. The SPD insists on linking any change to gender parity on candidate lists. Interior minister Alexander Dobrindt tried to force the issue onto the agenda, but SPD negotiators countered by raising the debt brake, which the Union opposes. Chancellor Merz said a decision must be reached by spring 2027.

1. Jul 2, 2026Coalition committee agrees on 34-point reform package
2. Jan 1, 2027Income tax reform and higher child benefit take effect
3. Mar 20, 2027Deadline for electoral law reform decision (spring 2027)

Political framing

Chancellor Friedrich Merz told ZDF the government wanted to prove it was capable of acting. SPD leader Klingbeil warned against "petty debates" and urged the coalition to push the package through. Both parties had wanted more – the SPD a larger tax cut, the Union deeper labour-law flexibility – but the final text reflects a compromise that, according to the institutes, leaves the structural weaknesses of the German economy largely untouched.