1 General government budget
1.1 Outlook for 2024 and 2025
1.2 Address challenges
2 Budgetary development of central, state and local government
2.1 Tax revenue
2.1.1 Second quarter and 2024 as a whole
2.1.2 Federal Government plans tax concessions
2.2 Central government finances
2.2.1 Second quarter and 2024 as a whole
In the Climate Fund, the deficit rose sharply by €8 billion to €9½ billion. This was chiefly attributable to subsidies for green electricity. This year, funding for the Renewable Energy Sources Act ( Erneuerbare-Energien-Gesetz – EEG ) came out of the Climate Fund’s coffers for the first time. Up to mid-2022, consumers were paying a levy on the price of electricity, which went towards subsidising renewable energies. This created an extensive reserve, as the estimated proceeds for green electricity were significantly exceeded. This reserve covered the need for subsidies up to the end of 2023. Starting this year, funding is coming from the Climate Fund. In addition, the Climate Fund was burdened by a year-on-year decline of €½ billion in revenue from European and national emission allowances. The surplus in the fund for inflation-indexed federal securities fell by €6 billion to €2 billion, as the core budget provided fewer grants against a backdrop of lower year-on-year inflation. The grants cover the costs incurred by the redemption of a security at a later date. The provision initially results in a surplus for the fund. Upon redemption, the fund then pays out and a deficit arises. The surplus in the Economic Stabilisation Fund ( ESF ) was also down (by €3½ billion to €1 billion). Revenue fell as fewer assistance loans that the fund had granted during the crisis years were repaid. Less significant was the fact that the fund’s spending on energy price assistance came to an end. In the Armed Forces Fund, the deficit climbed by €2½ billion to €3 billion. This increase reflects additional spending on procurement. Interest expenditure has been largely non-existent to date.
2.2.2 Plans for 2025
Net borrowing of €51 billion is planned. Under the debt brake, structural new borrowing of just over €14 billion is permitted. Borrowing to offset cyclical burdens of €10 billion is also possible according to the spring estimate. There are plans to acquire financial assets worth €27 billion net, which can likewise be credit-financed. A large proportion of this – just over €12 billion – is attributable to the generational capital fund, followed by capital contributions to Deutsche Bahn. At €10½ billion next year, these are set to be almost twice as high as in 2024. 13
The core budget is set to fully take over from the Climate Fund in providing funding under the Renewable Energy Sources Act. An amount of €16 billion is earmarked for this in 2025 in the core budget – and this accordingly eases the financial pressure on the Climate Fund. The draft budget takes account of the growth initiative: Tax revenue shortfalls from related measures (including compensation for bracket creep) are accounted for by a global revenue shortfall of €7½ billion. Meanwhile, a global revenue increase apparently amounting to €6 billion stemming from higher growth due to the initiative is envisaged as budgetary relief. There was no further explanation of how this estimate came about. Increased revenue from stronger growth only creates leeway under the debt brake if it results from higher potential GDP (otherwise it is considered cyclical and cannot then be used to finance other projects). However, a sharp short-term rise in potential GDP is unusual and does not seem likely here. Likewise due to the initiative, central government estimates a reduction in spending of just over €4½ billion on the civic allowance as compared with the draft supplementary budget for 2024. This would be a 16 % decrease and therefore seems very ambitious. The growth initiative still needs to be coordinated with the federal states. They will be financially affected by the tax cuts as well and usually call for further compensation in such cases.
Relief for central government is expected to come from Germany’s contributions to the EU . These look likely to be €8 billion lower than in the May tax estimate. In accounting terms, this will be reflected in higher central government tax revenue (and is budgeted for in a global revenue increase). Past budget estimates have contained extensive buffers. As things stand today, the revised estimate broadly lines up with the latest EU budget plans. Revenue of €3 billion is set to come from the liquidation of the Economic Stabilisation Fund for Energy Assistance. As its expenditure was financed using emergency borrowing, use of the funds in the 2025 budget would raise questions. The government intends to record interest expenditure on an accruals basis from 2025 onwards, which makes sense economically (see the above section on 2024). This is initially budgeted for as a global spending cut (i.e. as an amount that still needs to be saved during budget implementation). In the draft budget, this reduces net borrowing by €7½ billion. The government is additionally budgeting for a large global spending cut in a collective item in the “General financial administration” section (residuum spending cut). An amount of around €8 billion was typical here recently (just under 2 % of total expenditure); in the draft budget for 2025, it is now €12 billion. The Federal Government is seeking to further reduce this gap by the time the budget has been adopted. At the same time, the Finance Minister pointed out that the estimates in the draft budget for 2025 are tighter than in previous budgets. It is therefore likely to be more difficult to make global spending cuts during the implementation phase. Even with a normal-sized residuum spending cut, the need to make savings in the implementation phase is thus more ambitious than it initially appears.
Financial transactions and the debt brake
The government agreed to convert further grants to Deutsche Bahn in the amount of €4½ billion for infrastructure investment into capital contributions. Overall, Deutsche Bahn is now set to receive capital contributions of €10½ billion in 2025 (previously €6 billion was budgeted for 2025). The capital is expected to yield an appropriate return for the central government budget. The Federal Government has stated that it is currently in talks with Deutsche Bahn about how this can be ensured. If, instead of grants, Deutsche Bahn receives capital that yields a return for central government, this will, ceteris paribus, reduce future leeway for Deutsche Bahn . Deutsche Bahn is to receive a loan of €3 billion from the core budget and thus be relieved of interest burdens. Depending on the maturity, the interest that Deutsche Bahn pays on its issues will be up to 1 percentage point higher than what central government pays on its issues. 1 The central government loan will have a term of 34 years and an interest rate of 1.5 %. The Federal Government’s grounds for this decision is that the average interest on central government debt is currently 1.5 %. 2 However, central government will have to borrow new funds for the loan, and central government’s financing costs for 30-year federal bonds (Bunds) currently stand at 2½%. Thus, Deutsche Bahn will receive considerable support, and this measure is likely to place a burden on future central government budgets on balance.
Central government currently provides investment grants to the infrastructure component of Deutsche Bahn . According to the 2023 budget accounts, it had also made extensive grant commitments going beyond 2025. Unlike this kind of grant, a capital contribution (like a loan) does not, per se, trigger any need for action in order to comply with the debt brake. This is because it constitutes the acquisition of financial assets (financial transaction), exempting it from the debt brake. This reduces the need for consolidation at the central government level. Deutsche Bahn , on the other hand, has higher requirements and its future financial scope is smaller than in the case of pure grants. This raises the question of whether, from an economic point of view, it makes sense to record capital contributions instead of grants. To this end, the additional capital would have to yield an appropriate return. At present, however, it is not apparent how the infrastructure component of Deutsche Bahn is to generate such returns in the future. The switch would reduce its scope for spending or leave it needing to generate higher revenues. It would not make good sense if central government’s return were, in fact, financed by central government itself via future outflows from the central government budget (for example, via higher central government grants). In any case, it would be important to make it transparent how Deutsche Bahn intends to generate future returns using the new capital. It should also be borne in mind that another purpose of the debt brake is to ensure compliance with EU fiscal rules. The EU rules concern the general government sector as defined in the national accounts. In the national accounts, the infrastructure component of Deutsche Bahn belongs to the general government sector, more precisely to central government. Investment in Deutsche Bahn infrastructure thus increases the central (and general) government deficit in the national accounts. This is irrespective of whether a grant or a capital contribution is recorded in the core budget – both constitute transactions within central government in the national accounts. 3
Armed Forces Fund: Germany’s defence spending is set to exceed NATO ’s agreed 2 % of GDP (around €88 billion), as was the case in 2024. The largest contributions will come from the core budget, followed by the Armed Forces Fund. 14 The fund’s estimated expenditure for 2025 is moderately higher than for 2024. This is expected to increase its deficit from the €20 billion planned this year to €22 billion. The fund is set to use this to finance €21 billion in procurement; the procurement section of the core budget contains an added €2½ billion. However, in order to ultimately achieve the NATO target, procurement processes need to accelerate significantly: commitments for 2025 totalling €3 billion were entered into in the 2023 fiscal year. This meant that the authorisations were far from being fully utilised. 15 For 2025 as a whole, commitments from procurement contracts only amounted to just under €13 billion. They are thus well below the spending limits. It therefore appears that spending limits and appropriations for commitments are not so much the source of bottlenecks as the utilisation of those authorisations. Climate Fund: The financial plan for the Climate Fund from summer 2023 had envisaged a deficit of €28 billion for 2025 (2024: €29 billion), which was to be financed out of reserves. However, according to the plan for 2024, the reserves will be largely depleted this year. This would mean that there would be virtually no more reserves available to cover a deficit in 2025. To ease the burden on the fund, the government now intends to shift just over half of the deficit planned back in 2023 to the core budget. It intends to take over the provision of funding under the Renewable Energy Sources Act. 16 In addition, investment spending was budgeted more tightly. The Climate Fund’s plan for 2025 also contains global spending cuts of €9 billion and global revenue increases of €3 billion. This may reflect the expectation that, overall, the Climate Fund will have lower outflows and will actually still have substantial reserves at the end of this year (for more on developments in 2024, see Second quarter and 2024 as a whole ). The Climate Fund could then use these reserves to finance a deficit in 2025. This is consistent with the fact that central government’s borrowing plan for 2025 contains borrowing of €12 billion to finance the Climate Fund’s expenditure. Other: Even beyond the above, the planned deficit of the off-budget entities will decline: in 2024, the Digitalisation Fund is making a one-off payment of €4 billion to the core budget. This puts the fund in deficit; that deficit will not exist in 2025.
2.2.3 Outlook for subsequent years
As regards labour and social affairs, there is strong growth in central government funds for the statutory pension insurance scheme. The Federal Government’s plans envision a significant increase in the contribution rate for the statutory pension insurance scheme in 2028. This will drive strong growth in central government funds, as they are largely linked to that rate. This already includes the additional pressure on central government funds arising from the planned pension package, which is set to extend the threshold for the replacement rate beyond 2025. As a result, the contribution rate will rise more strongly in 2028 and central government funds will see greater growth thereafter as well. Expenditure on debt service will increase in the final two years especially. The first emergency loans will be due for repayment in 2028. There is no indication as to which part of the increase in expenditure is attributable to these. The Finance Minister had announced that the repayment plan might be extended once again and that much less would be repaid than previously planned (just over €9 billion). Defence spending in the core budget will go up by around half in 2028, to €80 billion. This will put considerable pressure to adjust on other sections of the budget.
2.3 State government budgets
2.3.1 Developments so far in 2024 and outlook to 2025
2.3.2 Federal states’ debt brakes still lack clarity
3 Social security funds
3.1 Pension insurance scheme
3.1.1 Outlook for 2024 and 2025
3.1.2 Reform options to strengthen the potential labour force
As is the case now, they can receive regular supplements to their later monthly pension payments. Alternatively, they could opt for a social contribution-exempt pension deferral bonus in future. A one-off payment of pension entitlements would be incompatible with the pay-as-you-go pension insurance scheme: pension entitlements would then be paid out early. This would result in expenditure rising more strongly at the current end under otherwise identical conditions. Giving insured persons options will tend to increase overall expenditure. This is because insured persons will choose the option that is likely to be the most beneficial for them. More complex rules will also increase the need to seek advice. Under the plans, the bonus will also be tax-free. Special tax advantages make taxation more complex and the tax base more patchy and create incentives for tax planning (see Federal Government plans tax concessions ).