Gaping deficit projecting in the Federal budget by 2029
The German government is bracing for a larger-than-expected budget gap in the years 2027 to 2029, as revealed in the financial planning for the 2026 budget. The gap, now estimated at approximately €172 billion, is a result of various factors, including fiscal policy compromises, increased defense spending, and rigid financial constraints from the debt brake [1][2][3][4].
The budget for 2026 is set to amount to 520.5 billion euros, a significant increase from the current year's budget, which is yet to be decided and will be decided in September [5]. The federal government plans to take on new loans of 89.9 billion euros in the core budget in 2026 [6].
One of the key reasons for the increased budget gap is the "growth booster" package, which includes tax relief for companies aimed at stimulating the economy. This relief, however, results in billions of euros in compensation for tax shortfalls at state and local levels [1].
Germany has also pledged intensified investment in modernizing its armed forces, committing €100 billion to a special defense fund since 2022. This spending pressure contributes to the broader fiscal challenges and increased deficit risk [4].
The debt brake, a constitutional rule limiting deficits, restricts the flexibility of the federal budget, complicating the government's ability to respond to new spending requirements. This has previously forced major budget cuts and a suspension of the debt brake to accommodate emergency expenditures like the COVID-19 package and green transition projects [3].
In an effort to address the fiscal challenges, the federal government plans to spend the funds from the 100-billion-euro special fund for the Bundeswehr by 2028 [7]. Reforms are also planned, such as making planning procedures faster [8].
An expert commission is to make proposals for a general reform of the debt brake in the Basic Law, while the Union has already dampened expectations of far-reaching relaxations in the debt brake reform [9]. Departments are expected to understand the difficult and challenging financial situation [10].
In addition to the budget gap, there are new debts of a total of 84.4 billion euros from two special funds, one for infrastructure and climate protection, and one for the Bundeswehr [11]. The federal government is particularly counting on the economy picking up and there being more tax revenues [2].
The second draft of the federal budget 2026 is to be approved by the cabinet on Wednesday, with the federal budget 2026 expected to be passed by the Bundestag by the end of November [12]. Despite the financial challenges, the federal government remains optimistic about the financial soundness of the 2026 budget after negotiations [2].
- The "growth booster" package, which includes tax relief for businesses and results in compensation costs at the state and local levels, contributes to the larger-than-expected budget gap in the years 2027 to 2029, as revealed in the financial planning for the 2026 budget.
- In addition to the budget gap, there are new debts of a total of 84.4 billion euros from two special funds, one for infrastructure and climate protection, and one for the Bundeswehr, adding pressure to the German business and finance landscape in the coming years.
