Budget amendments in Germany: Exploring the potential effects on tax reductions and pension plans for citizens
In a recent meeting, the German ruling coalition (CDU, CSU, SPD) made significant decisions regarding the Mothers' Pension and electricity tax cuts.
The government has decided to bring forward changes to the Mothers' Pension by one year, with the extended pension set to be introduced at the start of 2027, a year earlier than planned. This adjustment will extend three years of payments to all parents whose children were born before 1992. However, the implementation of these changes is expected to take place in early 2028 due to extensive individual entitlement checks.
In a turn of events, the electricity tax cut for German households, which was initially planned for 2025, has been abandoned. The planned reduction in the electricity tax, currently at 2.05 cents per kilowatt-hour, will only apply to the manufacturing sector, agriculture, and forestry, excluding private households. This decision was reaffirmed following proposals led by Finance Minister Lars Klingbeil (SPD).
The government insists that tax revenues lost from cutting the electricity tax need to be compensated by savings elsewhere, which they have not found for households. Consequently, cuts for consumers were shelved despite public outcry and criticism from consumer groups and energy companies.
The government maintains that the tax relief is intended for energy-intensive industries and small and medium-sized enterprises, and transmission grid fees and levies will be partially subsidized from January 2026, benefiting all consumers in a different way. The 2025 budget including these measures is expected to be finalized by the Bundestag in September 2025, with implementation pending further legal regulations.
It is estimated that only a maximum of 15 percent of businesses will benefit from the electricity tax cuts. The German Chamber of Industry and Commerce did not provide specific details on which businesses will benefit from the electricity tax cuts.
The second part of the pension package, including an active pension, an early start pension, and the Act to Strengthen Company Pensions, is set to be adopted in autumn of this year. The federal budget for 2025 has also been approved.
Stakeholders and voters have expressed dissatisfaction with the decision, feeling deceived. German households will continue to pay some of the highest electricity prices in Europe. The government's coalition agreement stated they would reduce electricity taxes for everyone, but only if financing was available.
The cost of the electricity tax cuts was expected to be €5.4 billion in 2026. In the coalition meeting, parties were unable to agree on where to find the necessary financing. German Chancellor Friedrich Merz defended the decision, stating "We can only spend the money we have."
In conclusion, the Mothers' Pension changes will bring benefits to a larger number of parents, but the electricity tax cut for households will not be implemented in the near future, limiting relief to specific sectors only.
The German government's 2025 budget, still pending approval by the Bundestag, is expected to allocate funds for the planned reduction in electricity tax for certain sectors such as manufacturing, agriculture, forestry, while private households are excluded. Meanwhile, finance-related discussions in the coalition meeting have stalled due to an disagreement on finding the necessary funding for the planned electricity tax cut for households, a move initially planned for 2025 but has since been abandoned.
