Federal Government Expects EUR16 Billion Annual Tax Revenue Shortfall

The updated tax estimate presents a significant setback for the newly formed coalition government shortly after taking office. Experts from the relevant working group have assessed various tax categories over three days, arriving at a disappointing conclusion: the state must prepare for reduced revenue in the near future. This situation is largely attributed to decisions made by the previous administration, which were anticipated and factored into the calculations, along with a persistent economic slowdown.

Overall, the tax revenue is projected to be EUR81.2 billion lower than previous estimates through 2029, primarily due to changes in tax legislation. The so-called estimate deviation, resulting from a revised assessment of the economic situation, is a minor EUR0.8 billion over five years. For 2025, a modest increase of EUR9 billion is expected, despite the former Minister of Economics, who had downgraded the growth forecast for this year to zero.

Finance Minister Lars Klingbeil is facing varied impacts from these new projections. This year, the deficit is expected to be a small EUR0.6 billion. Surprisingly, the estimate deviation is a positive EUR4.6 billion. However, next year, experts predict a decline of EUR10.2 billion in federal tax revenues, primarily due to recent legislative actions. In the following years, the federal tax shortfall is projected to remain in the high single-digit billion range. For Klingbeil, these results indicate the necessity of enhancing economic growth to bolster revenues, thereby creating new financial opportunities.

The updated tax estimate serves as a foundation for budget planning. The cabinet intends to finalize this year's budget on June 25 and will concurrently advance the key figures for the 2026 budget, aiming for approval before the summer recess, likely in July. The extent of the budgetary gaps remains uncertain, as it depends on other revenues and, crucially, on the coalition's planned expenditures.

Prior to the release of the new figures, Klingbeil emphasized in his inaugural address to the Bundestag that despite the coalition's investment ambitions, there is still an obligation to consolidate finances. He reminded that all projects outlined in the coalition agreement are contingent upon funding availability. Nevertheless, Klingbeil indirectly exempted the proposed tax relief measures aimed at businesses from this constraint by announcing forthcoming legislative proposals for these tax reductions.

The need for increased private investment, alongside public funding, is critical, according to Klingbeil, who announced plans for an investment boost, including depreciation allowances of up to 30% over the next three years, with a reduction in corporate tax rates anticipated by 2028. Furthermore, he reiterated the commitment to vital structural reforms aimed at lowering energy costs, accelerating approval processes, and reducing bureaucracy, all with the goal of enhancing Germany's international competitiveness.

However, the latest figures indicate a decline in foreign investment interest in Germany. According to a report from consulting firm EY, the interest has fallen to its lowest level since 2011, with only 608 projects announced in the previous year, a 17% decrease from the prior year. For the first time, Chinese companies showed the most investment activity in Germany, surpassing American firms.

France emerged as the most attractive destination for foreign investors in Europe, with 1,025 announced projects, followed by the UK with 853. Despite overall declines in both countries, Spain and Poland reported double-digit growth rates in 2024, with 351 and 259 announced projects, respectively. Concerns were raised in the Bundestag regarding the high tax burden in Germany, which is viewed by investors as a significant cost of doing business.