Berlin coalition scales back tax and welfare plans during budget negotiations

what happened

Chancellor Friedrich Merz's coalition has retreated from several disputed tax and social-benefit proposals, three senior lawmakers said in a joint statement reported by Reuters on Wednesday. The levy on sugary beverages will now start in 2028 rather than in the middle of 2027, and the planned charge on plastic packaging has been set aside for the time being.

A cut in electricity tax for all households, which Merz had strongly pushed, still has no funding source. Some industries already pay the EU minimum electricity rate of 0.05 cents per kilowatt-hour. The coalition also agreed to reverse some planned welfare reductions, including support for low-income parents.

The changes come as the CDU/CSU and its SPD partners settle final disputes over the 2027 federal budget, a plan of roughly 555.4 billion euros submitted to parliament earlier this year. Berlin is also trying to pull its economy out of an energy squeeze linked to the war while expanding defence outlays.

why it matters

For markets, the episode signals where German fiscal policy is heading. Scaled-back revenue measures and unfunded tax relief raise questions about financing, which matters for investors in German government bonds and the euro.

market impact

German bonds and the euro: budget compromises ease near-term fiscal risk, but funding questions remain open.

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