Germany's coalition government has approved a €23 billion tax cut package to support households affected by inflation.

The plan, primarily involving increased income tax thresholds, aims to reduce fiscal drag, where inflation-induced wage hikes push workers into higher tax brackets without real income gains.

Over the next few years, the tax-free allowance will increase in three stages, reaching €12,336 by 2026.

Despite potential benefits of around €430 per employed adult, the move has faced backlash from other political parties.

Critics argue it will strain Germany's budget, potentially creating a €20-25 billion gap.

Finance Minister Christian Lindner defended the cuts, emphasizing the need to adjust the tax system to inflation burdens.

However, coalition partners, including the Greens and Social Democrats, expressed concerns about the impact on defense and infrastructure funding.

The International Monetary Fund has also recommended Germany pause its debt brake and increase public investment.