The new coalition government made up of the Social Democrats, Greens and the Free Democrats (FDP) have set out an agreement with the aim of modernising Germany. 

Here’s the financial impact their plans could have on households and consumers in the coming months and years. 

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Low income earners to get more 

There’s good news for people who earn the minimum wage (Mindestlohn): it will jump from the current €9.60 to €12 per hour. This is likely to happen in the coming months. 

Furthermore, the earnings limit for mini-jobs will rise from €450 to €520, and for midi-jobs to €1,600 (from the current €1,300).

A mini-job is a position in Germany where the employee earns no more than a certain amount each month, allowing people to work fewer hours free of tax. A midijobbber, which also belongs to the category of low-income earners, receives a reduced tax burden.

Taxes, ‘spouse’ splitting, savings

The traffic light parties haven’t agreed on a fundamental tax reform. But there are some changes.

Ehegattensplitting, which refers to how married couples’ income taxes are calculated under the German law, with tax classes 3 and 5 is to be abolished in future.

This regulation, which has been in place since the 1950s, is said to have pushed many women into low-income jobs.

Moreover, the lower earner (mostly women) pays more tax than the partner with the higher income. Instead of ‘spouse splitting’, a so-called real splitting is to be introduced.

In future, married couples will be assessed individually on their income tax returns.

The coalition agreement states: “We want to further develop family taxation in such a way that partnership responsibility and economic independence are strengthened with regard to all forms of families.”

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Meanwhile, savers can expect relief. The savers’ allowance is to be raised from €801 to €1,000 for singles and from €1,602 to €2000 for couples – but not until 2023.

This would be the first increase in the allowance since 2007. Plus, the education allowance is to rise from €924 to €1,200. The ‘home office’ allowance, introduced in the pandemic due to so many people working from home, will be extended until the end of 2022.

Tax boosts

The new German government plans to put in place some tax relief, with the aim of benefitting single parents, families with children and people caring for relatives in particular. 

The coalition also wants to reform land transfer tax. 

Renting

The coalition partners do not plan a rent freeze which would see rents fall down and massive relief for tenants. 

The parties instead say they will extend the rent brake until 2029. That means that tenants can challenge their landlords to lower the rent prices, but it can often involve lengthy court cases so has been criticised. 

Landlords will soon only be allowed to hike up rents in tight housing markets (like Berlin or Munich) by a maximum of 11 percent in three years. Currently, the cap is 20 percent in general and 15 percent in districts with a tight market.

The coalition has set themselves the goal of building 400,000 new flats per year in Germany, with 100,000 of them publicly subsidised. They say this will ease the rental crisis.

Energy prices

The recent sharp rise in energy prices has put a heavy burden on many people across Germany. This is one of the reasons why the CO2 price will no longer be paid for by tenants alone. From June 2022, landlords will have to contribute, either in the form of a graduated model according to building energy classes or by paying half the amount.

The new government partners also want to provide relief on electricity prices by abolishing the EEG levy. After the agreed reduction in January 2022 (from 6.5 cents to around 3.7 cents per kilowatt hour), the EEG levy will no longer be paid for by households in their electricity bills from 2023 and will be paid out of the federal government budget.

But since the CO2 price on fossil fuels will continue to rise, experts expect energy to become more expensive, which will hit most consumers despite all the planned relief. The new government wants to set up a new fund to help hard-up families.

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Food costs

Rising energy prices could also make food more expensive in the coming years, as we’ve already seen in Germany.

The coalition parties plan to launch a so-called “nutrition strategy” by 2023, with the aim of ensuring that the share of regional and organic products grows, food waste is reduced and plant-based meat alternatives are promoted.

Meanwhile, cheap food is to be put under closer scrutiny. The coalition agreement states: “We will take action against unfair trade practices and examine whether the sale of food below production costs can be prevented.” Particularly cheap meat, as currently offered by discounters, could become more expensive in future.

Unemployment support will change

The new coalition wants to replace income support (known as Hartz IV), with a so-called citizen’s income – or Bürgergeld.

At the moment we still don’t have many details about this, though the main change will likely be that people won’t be immediately assessed on the size of their living space or savings when they apply for financial assistance. Other than that, parties haven’t said when it will happen, how the new system will work, or how much money people will get – though it’s unlikely to be much of a payrise for the unemployed.

Pensions

As Germans live longer while also having less children – and the babyboomers retire – the demographic makeup of society is changing dramatically. While the proportion of working age people to retirees is currently three to one, it is expected to increase to three to two by the year 2060.

So what does the country do about pensions?

The coalition has vowed to maintain state pensions at 48 percent of average salaries, with contributions capped at 20 percent of gross pay. This will not rise in the coming legislative period. According to the coalition agreement, there will be no pension cuts or a higher retirement age.

In a bid to keep these promises in the long term, the coalition wants to supplement pension system by a private provision based on shares. The agreement states that “this partial capital cover is to be professionally managed as a permanent fund by an independent body under public law and invested globally”.  Many details are, however, still unclear at this stage.