The magnitude of the gap in the federal budget.
The German government is bracing for a significant budget deficit, with projections indicating a shortfall of around €172 billion over the period of 2027-2029. This deficit is the result of ambitious investments in defense and transportation, expensive pension and social programs, increased debt servicing costs, tax cuts reducing revenues, and expanded net borrowing.
The deficit is primarily driven by increased defense and infrastructure spending. Germany plans to double its defense budget and boost public investment in transportation, particularly railways, via a large infrastructure fund (€19 billion for rail alone). This spending, partly financed through relaxed debt limits, adds substantially to fiscal strain.
Rising interest on existing debt is another major factor. As debt levels increase, so does the cost of servicing old debt, adding billions to the deficit projections and reflected in increased debt-servicing rates.
The government's approval of tax cuts and expanded borrowing, aimed at stimulating investment and reducing corporate taxes, is expected to decrease state and local government revenues. These cuts need to be compensated for, increasing the fiscal gap.
Pension hikes, including new initiatives like the CSU's 'Mother's Pension III', increase mandatory social spending, widening the deficit alongside other social benefit rises. The growth of the German economy is expected to be slight from 2026 onwards, according to the federal report.
The deficit also includes an increase in the costs of the "tax investment program", which allows businesses to write off investments from their taxes. Despite planned investments, other budget areas face cuts or lower revenues than expected, which combined with large off-budget funding commitments further widen the deficit.
The federal report does not currently account for the increased costs of health and social security contributions, which are expected to rise. Finance Minister Lars Klingbeil (SPD) is under pressure due to the projected deficit, which he has estimated to be approximately €95 billion by 2029.
The Taxpayers' Association, a financial watchdog, has criticized the federal government's financial policy, stating that it spends too much money. The Association had previously described the budget policy as "desolate" and criticized the government's debt offensive. Reiner Holznagel, head of the Taxpayers' Association, has reiterated his criticism, stating that the government's spending is excessive.
The federal government's expenses are expected to rise from €474 billion in 2024 to €572 billion by 2029. The net credit intake is expected to significantly increase from its current level. The deficit is attributed to investments in defense, transportation, increasing interest on old debts, a rise in net credit intake, and costs of the "tax investment program".
Amidst these challenges, the German government faces intense pressure to reform its debt brake— a constitutional fiscal rule limiting borrowing— and may consider spending cuts such as reducing unemployment benefits and subsidies if economic growth remains weak. Chancellor Friedrich Merz's administration is trying to balance ambitions for growth and defense modernization with fiscal sustainability.
[1] Source: Federal Report on the German Economy [2] Source: German Government Budget Projections [3] Source: Taxpayers' Association Report [4] Source: German Ministry of Finance Report
The deficit projections, as outlined in the German Government Budget Projections, reveal a significant budget shortfall of around €172 billion over the period of 2027-2029, primarily driven by increased defense and infrastructure spending, tax cuts, pension hikes, economic slowdown, and costs associated with the "tax investment program." This fiscal strain has led to the Taxpayers' Association, a financial watchdog, criticizing the federal government's financial policy for excessive spending, as reported in their latest statement.
Spending on ambitious defense investments and transportation infrastructure, including a large infrastructure fund for railways, accounts for a substantial portion of the deficit. In addition, escalating interest on existing debt and the expansion of net borrowing contribute to the growing deficit, as highlighted in the German Ministry of Finance Report.
