Federal Budget Faces EUR172 Billion Shortfall by 2029

The German government is confronting a significant budgetary challenge, with a projected deficit of approximately EUR172 billion between 2027 and 2029, as revealed by sources within the administration. This financial shortfall is set to be addressed in the upcoming federal budget plan for 2026, which is scheduled for approval by the cabinet on Wednesday.

Finance Minister Lars Klingbeil's budget proposal underscores the pressing need for action, particularly as the government prepares to tackle fiscal gaps in the coming years. The expected deficits have grown from an earlier estimate of EUR144 billion announced in June, primarily due to new commitments and compensations for tax losses affecting states and municipalities. The government's 'growth booster' initiative, aimed at stimulating the economy through corporate tax relief, is among the contributing factors to the increased budgetary pressure.

Additionally, a decision by the ruling coalition to advance the expansion of the maternal pension scheme to January 1, 2027, has further compounded the financial strain. The rising costs of debt service are also a critical aspect of the government's fiscal planning.

As Germany faces its third consecutive year without economic growth, the government is counting on an economic recovery to enhance tax revenues. Proposed reforms aim to streamline planning processes, while also emphasizing the need for budgetary prudence across various ministries.

Klingbeil's budget blueprint for 2026 anticipates expenditures of EUR520.5 billion, an increase from the previous year's budget. The 2025 budget is still pending approval, expected by September. Planned investments for 2026 are projected to reach EUR126.7 billion.

To manage its fiscal responsibilities, the federal government intends to incur new loans amounting to EUR89.9 billion, alongside an additional EUR84.4 billion from two special funds designated for infrastructure, climate protection, and military spending. Notably, the EUR100 billion special fund for the military is expected to be depleted by 2028, prompting the government to relax its debt ceiling for defense expenditures.

An expert commission will be tasked with proposing reforms to the constitutional debt limit, although there have been indications from opposition parties that expectations for substantial relaxations may be tempered.