Germany's Projected Federal Budget Deficit Set to Surge Significantly by 2029 - Anticipated Significant Increase in Federal Government Debt-to-GDP Ratio by 2029
Meeting NATO's Defense Spending objectives set for 2029 means a hefty hike in the government's defense budget
The government is set to boost defense spending to achieve NATO's gradual rise in defense expenditure to 3.5% of GDP by 2029. NATO also strives for a more ambitious target of 5% of GDP, with 1.5 percentage points designated for defense-relevant infrastructure. The proposed budget includes provisions for this increase, although no specific figures have been disclosed yet.
In 2025, defense spending is projected to reach 2.4% of GDP. According to the government's draft budget, defense spending in 2025 will amount to 62.4 billion euros, marking an increase of over 10 billion euros compared to the previous year. For 2026, 82.7 billion euros are planned, and for 2027, 93.3 billion euros.
This substantial increase is achievable due to the exception for external and internal security spending from the debt brake in the Basic Law, a decision made in March. This exception also covers expenses like aid for Ukraine, civil and population protection, and intelligence services.
Apart from the defense budget, funds from the special fund for the armed forces, established in 2022, will be available until 2027. After that, the fund will be depleted, and core budget defense spending will skyrocket to 136.5 billion euros in 2028, as per the financial plan.
The government's draft budget foresees new borrowing of 81.8 billion euros in 2025, 89.3 billion euros in 2026, and 87.5 billion euros in 2027. In 2028, net borrowing is expected to reach 115.7 billion euros,corresponding to the exhaustion of the special fund for the armed forces.
Additional loans for this special fund and for the new special fund for infrastructure and climate protection will also contribute to the debt in the core budget. In 2025, this amounts to an additional 61.3 billion euros, and in the following two years, over 80 billion euros each. Afterwards, without the special fund for the armed forces, this will be around 60 billion euros per year. Consequently, federal interest costs are also expected to rise significantly.
The extra loans are meant to fund not only higher defense spending but also significantly larger federal investments in infrastructure and climate protection. Federal investment is expected to be 115.7 billion euros this year, compared to 74.5 billion euros in 2024. In 2026, an investment sum of 123.6 billion euros is planned.
Apart from funds from the core budget, the new special fund for infrastructure and climate protection is expected to contribute 27.2 billion euros in 2025 and 47.9 billion euros in 2026. Additional funds from the Climate and Transformation Fund (KTF), primarily funded by revenues from CO2 emissions trading, will also be available.
The federal budget volume will increase by 6.1 percent to 503 billion euros in 2025, which is 28.8 billion euros more than in the previous year. By 2029, the federal budget volume is expected to reach 573.8 billion euros.
Considerations regarding the financial implications of the planned "investment booster" to stimulate the economy and compensate municipalities for the resulting tax losses are underway. Furthermore, budget plans account for promises from the coalition agreement to increase the commuter allowance, expand the mother's pension, and alleviate energy costs.
Efforts towards budget consolidation through measures, such as combating black work and tax evasion, reforming basic security, personnel reductions, and savings in development aid, are also mentioned in government circles.
Discussed Topics
- Defense budget
- Defense spending
- New debt
- Armed forces
- NATO
- Ukraine
- Intelligence services
- Infrastructure
- Climate protection
- Government borrowing
Noteworthy Insights
- NATO members have agreed to increase their defense spending targets from 2% of GDP to a combined 5% of GDP by 2035.
- Additionally, 1.5% of GDP is earmarked for security-related investments such as infrastructure, cyber defense, and resilience measures.
- Countries with limited fiscal capacity or political difficulties may face considerable new debt accumulation as a consequence of financing increased defense commitments.
- The council is deliberating on the budgetary procedure to boost defense spending, with the aim of achieving NATO's target of 3.5% of GDP by 2029.
- The rise in defense spending is expected to have significant implications on the government's budgetary procedure, particularly in terms of finance, business, politics, and general-news.
