German Chancellor Friedrich Merz has called for a reform of Germany's social welfare spending while ruling out tax increases on medium-sized companies.

The comments, made at a state-level party conference of his Christian Democratic Union (CDU) in Lower Saxony on Saturday, will likely be seen as paving the way for further contention with his government coalition partners, the Social Democrats (SPD).

What did Merz say about cutting welfare?

"The welfare state that we have today can no longer be financed with what we produce in the economy," Merz said in the town of Osnabrück. 

The coalition partners had already agreed to reforming the social insurance system, which covers health insurance, pensions and unemployment benefits, due to rising costs and gaps in the federal budget.

The chancellor acknowledged that making cuts to social welfare would not be easy for the center-left SPD, but called for the two parties to work together.

At the same time, he stressed there would "not be any increase in income tax on medium-sized companies in Germany with this federal government under my leadership," despite SPD Vice Chancellor Lars Klingbeil earlier saying that tax increases on middle and higher-income earners could not be ruled out.

Is the German CDU-SPD coalition headed for trouble?

Klingbeil has also called for social welfare reforms, but stressed the need for imaginative solutions rather than just cuts for workers.

"We will remain a country that helps people who have fallen onto hard times, who have gotten sick and need help," the deputy chancellor told the Funke media group on Saturday.

Philipp Türmer, the head of the SPD's youth organization Jusos, said to the Stuttgarter Zeitung daily that if the idea behind reforms was just to cut benefits, then "the SPD cannot give an inch."

Merz has struggled to appeal to his base since coming into office and his Saturday comments can be seen as a nod to the traditional CDU voter, as well as those former CDU voters who have turned to the far-right Alternative for Germany (AfD).

"I'm not satisfied with what we have achieved thus far," the chancellor said to the Osnabrück audience. "It has to be more."

The SPD has traditionally seen itself as the defender of the welfare state and will likely be unwilling to back major cuts, especially in light of its vote share collapsing in the last election.

Edited by: Saim Dušan Inayatullah