Monthly Report – August 2024

Article from the Monthly Report

1 General government budget

1.1 Outlook for 2024 and 2025

Germany’s deficit ratio is likely to decline moderately in 2024 and 2025 – not as a result of an austerity policy, but rather due to crisis assistance coming to an end. The deficit ratio stood at 2.4 % in 2023, 1 with temporary burdens from crisis assistance still amounting to around 1½% of gross domestic product (GDP). 2 In 2024 and 2025, these burdens will come to an end. In other areas, however, the budgets are likely to deteriorate. Terminated crisis assistance aside, the budgetary stance is rather loose. In this respect, Germany is not pursuing an austerity policy.

In 2024, the expiry of the energy price brakes should do the most to relieve pressure on the government budget. During the crisis, amid fluctuating energy prices, these acted as automatic stabilisers: in 2024, gas and electricity prices at the upstream stages are likely to be substantially lower again; the absence of the energy price brakes will probably have only a minimal impact on economic growth in this respect. This phased-out relief is being offset by deficit-increasing developments elsewhere. In particular, the high inflation rates of recent years are still reflected in additional government expenditure. For instance, tangible asset purchases and public sector wages are seeing dynamic growth. Pension benefits are also rising significantly. By contrast, weak economic developments are weighing less on government budgets than the real GDP outlook suggests: the macroeconomic reference variables for taxes and social contributions are still growing significantly in nominal terms. In addition, the labour market is broadly stable.

In 2025, the deficit ratio is likely to decline as the tax and social contribution-exempt inflation compensation bonuses will have come to an end. This will generate additional government revenue. This is because, in net terms, bonuses will be replaced with wage components subject to taxes and social contributions. However, the Federal Government, with its recent budgetary decisions, has announced new and in some cases deficit-increasing measures.

Overall, the general government deficit ratio as per the national accounts could be between 1½% and 2 % next year. This is not at odds with the fact that central government and presumably almost all federal states are planning to comply with their debt brakes without making recourse to the escape clause. This is because the debt brake allows for higher deficits, amongst other things, if sufficient reserves are available. 3 In addition, outside the scope of the debt brake, there will be a deficit in the Armed Forces Fund, which central government puts at ½% of GDP. Other off-budget entities outside the scope of the debt brake can also run deficits in the national accounts (such as, for example, the infrastructure component of Deutsche Bahn, which is included in the general government sector; see the supplementary information Financial transactions and the debt brake). Furthermore, central government and most federal states can absorb cyclical deficits beyond structural borrowing limits.

In view of the expected deficits and nominal GDP growth rates, the debt ratio is expected to continue declining towards 60 %. The debt ratio amounted to 63.4 % at the end of the first quarter of 2024, having stood at 63.6 % at the close of 2023.

1.2 Address challenges

Germany is facing major challenges, particularly with regard to demographic and geopolitical developments and climate change. The government is therefore called upon to facilitate the necessary adjustments by establishing appropriate framework conditions. Most recently, the Federal Government presented a growth initiative, the objective of which reflects major challenges. The package of measures aims to strengthen incentives for employment and investment and to improve the framework conditions for reliable energy provision. The aim of the initiative is to make public administration more efficient and digital and to reduce bureaucratic burdens on the economy. Many measures address appropriate issues. However, a number of details still need to be clarified; the new special rules are not entirely in line with the aim of reducing bureaucracy, and in some cases, further-reaching steps are needed (see also Federal Government plans tax concessions and Reform options to strengthen the potential labour force). In some key areas, state and local governments have joint or primary responsibility. These areas include education, essential parts of infrastructure, approvals of renewable energy systems and construction and tax law matters.

Accomplishing these tasks whilst ensuring sound government finances poses a particular political challenge. Political compromises are often found more quickly when new debt is incurred, as such debt does not constrict government budgets until further down the line. However, this is precisely what engenders the risk of rising debt ratios and ever-increasing interest burdens. To prevent this, the debt brake sets a binding borrowing limit. Once the limit is exhausted, new budgetary burdens need to be covered directly, either by generating higher revenue or making savings elsewhere. Growth-friendly reforms have a positive impact on government budgets and the debt burden. However, these effects are only felt in the medium to longer term, for the most part, and are difficult to gauge. For reliable budget planning, it seems advisable to make more cautious assumptions, or else larger budget gaps might emerge further down the line. A strong fiscal policy shift would then be needed to plug these gaps, and fiscal policy would become erratic.

An effective debt brake is important for sound government finances; however, the scope for borrowing under the debt brake could afford to be somewhat larger if the debt ratio is low. A moderately increased borrowing limit given a debt ratio below 60 % can be well justified as long as the debt brake is applied consistently. As part of such a reform, scope for borrowing could also be reserved for particularly important tasks. In this vein, the Bundesbank outlined a capped golden rule to create targeted additional scope for net government investment. A moderately increased borrowing limit that is consistently binding can continue to effectively safeguard sound government finances and the 60 % reference value for the debt ratio. By contrast, if the existing limit is undermined, it loses its binding effect. The debt brake would then be at risk of becoming redundant.

The new EU fiscal rules are facing their first test: budgetary requirements must be sufficiently ambitious to promote sound public finances in the euro area. The stated objective of the rules is to lower high deficit and debt ratios. This is because sound public finances in the Member States are important for a stability-oriented euro area. They increase its crisis resilience and support the monetary policy of the Eurosystem. During the reform of the rules, a great deal of emphasis was placed on national ownership. To this end, Member States have a certain degree of scope to set their own country-specific budgetary limits. In return for this, however, they should feel more tightly bound to the borrowing limit than before. A stronger binding effect is desirable here. At the same time, the commitments made must also be ambitious enough to achieve the budgetary objectives. The European Commission and ECOFIN remain responsible for ensuring this. Budgetary limits for the next four or seven years will be agreed by this autumn, allowing for an assessment of how the new rules perform in their first test.

2 Budgetary development of central, state and local government

2.1 Tax revenue

2.1.1 Second quarter and 2024 as a whole

Tax revenue increased by 5½% in the second quarter. Growth was fairly broad-based across the major items wage tax and VAT. Revenue from the taxation of dividends and of interest income also rose sharply. These increases were attenuated by declines in corporation tax, assessed income tax and electricity tax. Revenue from electricity tax declined because legislators provided significant relief for energy-intensive enterprises as from the start of the year.

Table 5.1: Tax revenue
Type of taxH1

Estimate

for 20241

Q2
2023202420232024
billionYear-on-year
change
Year-on-year
change
billionYear-on-year
change
billion%% billion%
Tax revenue
Total2

399.8

414.0

+ 14.3

+ 3.6

+ 4.1

200.0

211.0

+ 11.0

+ 5.5

of which:
Wage tax3

115.2

119.8

+ 4.5

+ 3.9

+ 6.6

59.5

62.6

+ 3.1

+ 5.2

Profit-related taxes

78.2

83.6

+ 5.4

+ 7.0

+ 0.7

39.4

43.3

+ 3.9

+ 9.9

Assessed income tax4

35.2

33.9

− 1.3

− 3.6

− 2.4

15.5

14.8

− 0.6

− 4.1

Corporation tax5

23.1

20.5

− 2.6

− 11.3

− 4.9

12.4

10.4

− 2.0

− 16.5

Non-assessed taxes on earnings

16.4

19.4

+ 3.0

+ 18.2

− 12.3

9.8

13.9

+ 4.1

+ 41.3

Withholding tax on interest income and capital gains

3.5

9.8

+ 6.3

+ 181.9

+ 115.3

1.7

4.2

+ 2.5

+ 150.0

VAT6

140.8

144.9

+ 4.1

+ 2.9

+ 5.0

67.3

71.2

+ 4.0

+ 5.9

Other consumption-related taxes7

43.3

43.8

+ 0.6

+ 1.3

+ 1.8

22.0

21.9

− 0.0

− 0.2

Sources: Federal Ministry of Finance, Working Party on Tax Revenue Estimates and Bundesbank calculations. 1 According to official tax estimate of May 2024. 2 Comprises joint taxes as well as central government taxes and state government taxes. Including EU shares in German tax revenue, including customs duties, but excluding receipts from local government taxes. 3 Child benefits and subsidies for supplementary private pension plans deducted from revenue. 4 Employee refunds and research grants deducted from revenue. 5 Research grants deducted from revenue. 6 VAT and import VAT. 7 Taxes on energy, tobacco, insurance, motor vehicles, electricity, alcohol, air traffic, coffee, sparkling wine, intermediate products, alcopops, betting and lotteries, beer and fire protection.

Wage tax revenue grew at a similar rate to total revenue, although tax cuts slowed this down. In particular, income tax brackets were adjusted rightwards to compensate for the bracket creep of the previous year. Without tax cuts, revenue would probably have increased roughly twice as fast.

Revenue from profit-related taxes rose dynamically by 10 %. Intra-year shifts appear to have been a major contributor to this. On balance, the growth was attributable solely to non-assessed taxes on earnings (+€4 billion). These are income tax payments on dividends, which – in Germany – are often paid following annual general meetings of enterprises. These payments sometimes shift between quarters from year to year. Following the surge in the second quarter, a decline is expected in the third quarter. Withholding tax on interest income and capital gains also continued to rise extremely sharply. The increase is likely to be primarily attributable to a significant increase in interest income. This is because the interest rate level was higher than in the previous year – especially for deposits. The structure of deposits also changed, shifting towards higher-interest-bearing securities. By contrast, revenue from assessed income tax and corporation tax decreased. Advance payments of these major revenue items for the current year fell slightly (income tax) or rose slightly (corporation tax). At the same time, higher repayments for previous years reduced the result.

Revenue from VAT rose by 6 %, bolstered by VAT rate cuts coming to an end. The reduced tax rate on restaurant meals returned to normal at the end of 2023. Natural gas and district heating rate cuts expired at the end of the first quarter of 2024. VAT is paid with a delay of up to two months. The return to standard rates may therefore have had a marked impact on revenue for the first time in the second quarter.

For 2024 as a whole, the official tax estimate figures from May (+4 %, excluding local government taxes) are still achievable. 4 For this to be the case, revenue will have to increase more strongly in the second half of the year than it did in the first (+3½%). A more pronounced acceleration than in the first half of the year is expected for the significant wage tax item. This is because, relative to the previous year, taxable wage components are likely to increasingly replace tax-free inflation compensation bonuses. In the case of VAT, the fact that the aforementioned return to standard rates is now boosting receipts throughout the entire half-year would suggest an acceleration. However, an elevated prior-year figure will have a dampening effect: in the second half of 2023, significant VAT payments from other EU countries were recorded retroactively. 5 This is unlikely to be repeated in the second half of 2024. It is difficult to predict how strong these opposing effects will be. For non-assessed taxes on earnings, the Working Group on Tax Estimates anticipates that revenue in the second half of the year will be significantly lower than in the previous year. However, following the surprisingly strong second quarter, the result for the year as a whole could be somewhat higher than estimated.

2.1.2 Federal Government plans tax concessions

In its growth initiative, the Federal Government has outlined measures including tax incentives for investment and employment. Financially speaking, the most important component is the compensation for inflation-induced bracket creep in 2025 and 2026. This will offset the increase in the tax burden caused by the inflation of the respective previous year. In this context, it is a constitutional requirement to make regular increases to the basic income tax allowance, which keep the minimum subsistence level tax-free. In addition, it has been customary for a number of years to shift the other tax brackets to the right. 6 However, as in 2023 and 2024, this will not apply to the top tax bracket. In addition, the government intends to extend declining-balance depreciation until 2028 and raise the depreciation rate from 20 % to 25 %. In principle, this measure appears to be suitable for temporarily supporting business investment. Stronger tax depreciation options shift tax revenue into later years, first and foremost: greater tax depreciation means lower taxable profits (lower tax payments) at the start of an asset’s useful life. In later years, tax depreciation will then be lower and tax payments will be higher.

Furthermore, the Federal Government is proposing that supplements for overtime work be exempted from tax and social contributions. Although strengthening incentives for employment is generally desired, it is questionable whether, overall, further special tax advantages are beneficial. At the very least, equal taxation according to ability to pay is precluded if some incomes receive preferential treatment. Tax law will also become more complicated and more vulnerable to manipulation if the division of working hours into overtime and regular working hours affects tax payments. Moreover, this is not in line with the aim of reducing red tape. One strategy that works in the opposite direction would be to limit or eliminate income tax exemptions and relief and, in return, move income tax brackets to the right: currently, for example, supplements for work on Sundays and public holidays as well as night work are exempt from income tax. Some pension provisions are also tax-privileged. In the case of another government proposal, the situation is different: employees who work beyond the statutory retirement age will no longer be expected to pay unemployment and pension insurance contributions from their wages. This makes sense, as the employer contribution has thus far been a special levy for such employees (see Reform options to strengthen the potential labour force).

For 2025 as a whole, the official tax estimate anticipated a growth rate of + 4½% but with the planned measures, it is likely to be lower. The Federal Cabinet has already passed some measures, such as the aforementioned compensation for bracket creep and accelerated depreciation. Added to these are, amongst other things, higher child benefits and child tax allowances. The Federal Government is also planning to raise the income tax allowances for 2024 again. It therefore does not anticipate tax revenue shortfalls until 2025. Further tax measures under the growth initiative are likely to reduce revenue, too. The shortfalls associated with the measures as a whole will become greater over the following years, because the income tax brackets will then have been shifted to the right again and revenue losses caused by accelerated depreciation will increase over a number of years.

2.2 Central government finances

2.2.1 Second quarter and 2024 as a whole

The deficit of central government including off-budget entities was markedly higher in the second quarter of 2024 than in the same quarter of the previous year. It increased from €5 billion to €13 billion. In the core budget, the deficit fell steeply from €18 billion to €5 billion, with one-off effects contributing significantly to this. In the off-budget entities, however, the result deteriorated even more sharply, by €21 billion, with the Climate Fund being the hardest hit.

The core budget deficit decreased, primarily owing to a steep decline in interest expenditure. As a result of declining inflation, considerably less needed to be spent on inflation-indexed federal securities. Moreover, for calendar-related reasons, extensive mid-year interest payments will only be booked in the third quarter of this year (2023: in the second quarter). Lower transfers to the EU budget and higher privatisation proceeds also eased pressure on the budget. By contrast, expenditure increases brought about by the first tranche of capital contributions to Deutsche Bahn, the civic allowance and personnel spending had a negative impact.

In the off-budget entities, the result deteriorated sharply. All of the major entities contributed to this:

  • 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.

For the current year as a whole, the Federal Government is now planning to run a total deficit of €113 billion in the core budget and off-budget entities (actual 2023: €88 billion; for this and the following figures, see Table 5.2). For the core budget, the government decided on a draft supplementary budget that adds €11 billion to the current planned deficit, taking it to €61 billion. The planned deficit for the off-budget entities remains unchanged at €52 billion. That of the Climate Fund remains at €29 billion, and as before the fund is to cover this with reserves. What has been newly decided, however, is a central government grant to the Climate Fund to compensate for additional burdens compared with previous plans. As previously planned, the Armed Forces Fund is to finance a planned deficit of €20 billion using credit.

Table 5.2: Key central government budget data1
billion
ItemActual 2023Target 2024Draft supplementary budget 2024

Draft

2025

Fiscal plan
202620272028
1.Expenditure of central government budget (CGB)2

457.1

476.8

488.9

488.6

474.6

486.2

497.8

of which:
1.a Investment

55.0

70.5

70.8

81.0

77.5

75.5

71.4

1.b Global spending increases/cuts

-

− 10.5

− 10.8

3 − 17.8

.

.

.

2.Revenue of CGB2,4

392.2

427.5

428.2

436.6

435.8

451.6

467.7

of which:
2.a Tax revenue5

356.1

377.6

374.4

388.2

399.9

413.9

427.7

2.b Global revenue increases/shortfalls

-

− 2.0

1.7

6.9

.

.

.

3.Fiscal balance of CGB (2.-1.)

− 64.9

− 49.4

− 60.7

− 52.0

− 38.8

− 34.6

− 30.1

4.Coin seigniorage of CGB

0.2

0.2

0.2

0.2

0.2

0.2

0.2

5.Transfer to (-)/withdrawal from (+) reserves in CGB

37.5

10.2

10.2

0.5

-

-

-

6.Net borrowing (-)/repayment (+) of CGB (3.+4.+5.)

− 27.2

− 39.0

− 50.3

− 51.3

− 38.6

− 34.4

− 29.9

7.
Cyclical component in the budget procedure6

− 7.1

− 7.7

− 19.0

− 9.8

− 6.3

− 3.0

0.0

8.Balance of financial transactions of CGB

− 7.7

− 16.9

− 16.9

− 27.1

− 17.5

− 16.1

− 14.2

9.Structural net borrowing (-)/repayment (+) (6.-7.-8.)

− 12.4

− 14.4

− 14.4

− 14.4

− 14.8

− 15.3

− 15.7

10.Amount exceeding limit in CGB (13.-9.)

7 1.4

-

-

-

-

-

-

11.Amount exceeding limit incl. ESF-E (10.-15.)

42.9

-

-

-

-

-

-

12.Memo item: Amount exceeding limit with balance of off-budget entities (10.-16.-17.)

46.4

34.5

34.5

13.8

-

-

-

13.

Standard upper limit: Structural net borrowing (0.35 % of GDP)8

− 12.6

− 14.4

− 14.4

− 14.4

− 14.8

− 15.3

− 15.7

14.Structural balance of CGB (3.-7.-8.)

− 50.2

− 24.8

− 24.8

− 15.1

− 15.0

− 15.5

− 15.9

14.aAs before, with estimate of potential output acc. to 2024 spring forecast

− 48.2

− 19.8

− 31.1

.

.

.

.

15.Structural net borrowing of ESF-E

− 41.5

-

-

-

-

-

-

16.Deficit of ESF-E

− 41.5

-

-

-

-

-

-

17.Balance of special funds (SFs) relevant to the debt brake prior to 20229

− 3.5

− 34.5

− 34.5

− 13.8

.

.

.

17.a Climate and Transformation Fund

− 1.7

− 28.7

− 28.7

− 12.3

.

.

.

17.b 2013 Flood Relief Fund

− 0.2

− 0.2

− 0.2

− 0.1

.

.

.

17.c Fund to Promote Municipal Investment

− 0.6

− 0.9

− 0.9

− 0.6

.

.

.

17.d Digitalisation Fund

− 1.1

− 4.1

− 4.1

-

-

-

-

17.e Fund for Primary School-Age Childcare Provision

0.0

− 0.7

− 0.7

− 0.8

.

.

17.f 2021 Flood Relief Fund

0.0

-

-

-

-

-

-

18.Balance of SFs for making provisions for repayment and for extending childcare

4.0

2.2

2.2

0.7

.

.

.

19.Balance of other SFs without own constitutional rules10

23.9

.

.

.

.

.

.

20.Balance of Armed Forces Fund (from 2026: e)

− 5.8

− 19.8

− 19.8

− 22.0

− 24.5

− 28.0

-

20.a Borrowing authorisation remaining thereafter (from 2026: e)

94.2

74.4

74.4

52.4

28.0

-

-

21.Balance of CGB and SFs (3.+16.+17.+18.+19.+20.)

− 87.8

− 101.4

− 112.8

− 87.1

− 63.3

− 62.6

− 30.1

22.Reserves of SFs for 17.

38.3

3.8

3.8

11 2.0

.

.

.

23.Central government assets in civil servants’ pension reserves and pension fund12

33.3

.

.

.

.

.

.

24.Level of general reserves

10.7

0.5

0.5

-

-

-

-

25.Balance on control account

49.2

49.2

49.2

49.2

49.2

49.2

49.2

26.Total outstanding repayment amount including Armed Forces Fund13 (from 2026: e)

340.7

360.5

360.5

382.5

406.9

434.9

434.9

27.Total outstanding repayment amount from NGEU grants (e)14

46

69

69

87

106

106

103

1 Sources: Deutscher Bundestag, Federal Ministry of Finance and Bundesbank calculations. For methodological notes, see Deutsche Bundesbank (2016). 2 Excluding transfers to/withdrawals from reserves and including net tax revenue (see footnote 5). 3 Global spending cut for recording discounts on an accruals basis not included. 4 Excluding coin seigniorage. 5 After deduction of supplementary central government transfers, shares of energy tax revenue, compensation under the 2009 reform of motor vehicle tax and budgetary recovery assistance to federal states. 6 For 2023 according to the 2023 budget accounts, for Target 2024 according to 2023 autumn projection, for Draft supplementary budget 2024 amended by lower GDP growth according to the 2024 spring projection. 7 Calculated: -€0.18 billion. Recorded: €1.37 billion. Corresponds to actual payment to the 2021 Flood Relief Fund, for which the escape clause was activated. Difference between the two amounts credited to the control account. 8 Based on GDP in the year before the (comprehensive) budget is prepared. 9 Draft supplementary budget 2024 and Draft 2025 from respective borrowing plans. 10 Entities with quarterly data, but with no figures in borrowing plan. Above all, ESF (excluding ESF-E) and pension provisions. 11 Of which: Climate Fund taken into account with €0.0 billion. For information on the Climate Fund in 2025, see Plans for 2025. 12 Market values according to central government balance sheet for 2023. Continuous inflows; withdrawals from the fund planned from 2030, from reserves from 2032. 13 Extrapolation of the previous year’s figures with items 11 and 20; in Actual 2023, including change in the control account, following removal of reserves from emergency borrowing. 14 NGEU budgeted figures and estimates, each multiplied by Germany’s share of 25 % in EU gross national income.

The 2024 draft supplementary budget for the core budget increases the level of net borrowing permitted because the cyclical adjustment was updated. The resulting leeway is being used to provide more resources to the Climate Fund. The government updates the cyclical component according to the usual procedure. 7 As nominal GDP growth is lower than originally expected (-1½ percentage points), the notional cyclical burden is just over €11 billion higher (see item 7 in the table). 8 The borrowing limit under the debt brake is accordingly higher. Since estimated burdens are hardly greater than budgeted figures on balance, additional fiscal space is created: the tax revenue estimates are even somewhat higher (item 2.a plus 2.b in the table). This is because weaker nominal GDP has barely any impact on the tax estimate. In addition, the Federal Government is budgeting for additional revenue: it evidently expects that it will have to transfer much less to the EU budget than indicated by the tax estimate. Additional expenditure of €3½ billion is estimated for the civic allowance, but provisions for personnel expenditure were reduced somewhat. The remaining scope covers a new grant of just over €10 billion to the Climate Fund. This will mainly compensate for the fund’s higher subsidies to support renewable energy. It will also cover the fund’s revenue losses following a drop in the price of EU emission allowances.

From today’s perspective, the core budget could see a more favourable outturn in 2024 than projected in the draft supplementary budget. At mid-year, privatisation proceeds were €3½ billion higher than the budget estimate. In addition, lower expenditure on interest and tangible asset purchases, for example, looks possible. On the other hand, if the estimated NGEU revenue (€13 billion) is not received before the close of the year, this would be a burden on the 2024 budget. However, central government should be able to avoid this by swiftly applying to the EU for the funds. 9 The supplementary budget looks set to be adopted at the beginning of November. By then, most major deviations from previous budgetary estimates are likely to be foreseeable. It thus seems appropriate to update the plan in line with the draft. Additionally, the Federal Government’s autumn projection should be available by then. This will then also be the basis for a new cyclical component. 10 The supplementary budget provides the option of recording interest expenditure on an accruals basis from 2024 already. This is planned from 2025 onwards in any case. Seeing as discounts of €9 billion are estimated for this year, switching to accruals-based accounting would provide budgetary relief in 2024. 11 The switch was proposed by the Bundesbank, amongst others, because it depicts the true economic nature of interest burdens and facilitates consistent budgetary management.

The deficit of the off-budget entities could be far lower than planned in 2024. The draft supplementary budget for 2024 also contains no budget figures for the ESF. This fund is likely to generate significant surpluses from repayments of assistance loans. The Armed Forces Fund is also likely to have a better outturn than indicated by the budget. Its outflows had only come to just over one-quarter of the budgeted annual amount by mid-year. The contractual obligations for 2024 reported at the end of 2023 also indicate that the fund will post a smaller deficit than planned. 12 The deficit of the Climate Fund likewise looks set to be considerably smaller than estimated (€29 billion). It may remain roughly at the level of €15 billion from the first half-year. This is because its revenue from emission allowances is mainly received in the second half of the year, which is also when the newly planned transfer from central government will provide relief. This transfer is expected to fill up the fund’s reserves on balance, allowing it to run further deficits in future.

2.2.2 Plans for 2025

Last year’s fiscal planning for 2025 contained only a moderate gap, but this has gradually widened. In summer 2023, the Federal Government cited an unspecified need for €5 billion in order to comply with the borrowing limit under the debt brake. Another €6 billion was added in the budget planning for 2024, as those plans showed there would be virtually no reserves left for 2025. In addition, the revenue estimates according to the May tax estimate were revised downwards by €4 billion. Moreover, following the Federal Constitutional Court’s ruling, the interest accrued by the dissolved Economic Stabilisation Fund for Energy Assistance (ESF-E) and the funding needs of the 2021 Flood Relief Fund (a combined amount of around €5 billion) had to be financed out of the core budget. Offsetting this was €8 billion owing to higher cyclical burdens, which raised the borrowing limit under the debt brake. This left a gap of €12 billion. Regardless of this, a number of ministries stated significantly higher expenditure than in the old fiscal plan during consultation on the 2025 draft budget. The Finance Minister also intended to further compensate for bracket creep in the income tax scale. Finally, it was unclear how the Climate Fund is to continue running with part of its reserves struck from the books.

The draft central government budget for 2025 complies with the borrowing limit (see Table 5.2). However, some questions still remain, and planning is much tighter than previously. Key data and required measures:

  • 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.
Supplementary information

Financial transactions and the debt brake

The Federal Government had in the meantime reviewed whether the scope of the debt brake could be extended by having central government issue loans instead of grants to Deutsche Bahn and Autobahn GmbH. The aim was to reduce the residuum spending cut and thus the need for consolidation from €17 billion originally in the July plans to €8 billion (for more on the residuum spending cut, see Plans for 2025).

After the review, however, the Federal Government refrained from taking this course of action. It is now planning new financial transactions with Deutsche Bahn. These amount to €7½ billion. The initially estimated residuum spending cut is reduced by the amount in which central government is converting a grant to Deutsche Bahn into a capital contribution (€4½ billion). In addition, central government is to grant a new loan to Deutsche Bahn (€3 billion) to provide interest relief. This does not reduce the residuum spending cut, because the additional loan is offset by higher borrowing needs in order to finance it. Specifically:

  1. 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.
  2. 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.

Converting investment grants into capital contributions raises questions from an economic perspective. It also means that the debt brake is further removed from the EU fiscal rules it is supposed to safeguard.

  • 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

Central government is planning for the off-budget entities’ overall deficit to decline significantly in 2025. The plans for the Climate Fund are key to this.

  • 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.

From the current standpoint, both the deficit of central government and its off-budget entities in 2024 as well as the deficit reduction this year could be smaller than planned (for more on planned developments in the general government deficit in 2025, see Outlook for 2024 and 2025). According to the plans, the deficit of central government (core budget and off-budget entities combined) will shrink by €26 billion to €87 billion. 17 In reality, however, a smaller reduction looks to be on the cards. For one thing, a lower deficit than envisaged appears possible for the starting year of 2024. For another, if the 2024 outturn is more favourable, there will be larger reserves available to finance deficits in 2025. Overall, it remains to be seen for 2025 whether any remaining global spending cuts, global revenue increases and savings on the civic allowance will actually materialise. Moreover, central government could end up having to shoulder greater burdens in the wake of negotiations with state governments about the growth initiative. What is more, the Federal Constitutional Court announced that this year it will be hearing a constitutional complaint about the solidarity surcharge of 1995 in its amended version from 2021 onwards. This represents a revenue-side risk.

2.2.3 Outlook for subsequent years

Planning for the subsequent years 2026 to 2028 indicates large gaps in the budget. In the final year of the fiscal plan, the resources of the Armed Forces Fund are exhausted. The core budget must then cover the Armed Forces Fund’s credit-financed expenditure in the context of the debt brake in order to comply with NATO commitments. In the medium-term fiscal plan from summer 2023, the Federal Government had already identified an unspecified need for action amounting to €5 billion per year for 2026 and 2027. Added to this were revenue shortfalls of more than €7 billion annually based on the May tax estimate. In addition, growing revenue shortfalls stemming from the announced tax measures will have to be absorbed. At the same time, central government will obtain no further relief from switching the accounting method for discounts. Central government will also have to cover funding under the Renewable Energy Sources Act out of the core budget (in the order of €15 billion annually). Central government’s greater involvement will ease the burden on the Climate Fund, but in order to provide relief for the core budget, in turn, central government appears to have budgeted that it will draw sizeable revenue from the Climate Fund from 2027 onwards. However, it is still unclear how the fund is to finance this and its other large-scale projects in the medium term.

In the new fiscal plan, expenditure appropriations of most ministries are nominally frozen up to 2028. Aside from the Ministry of Labour and Social Affairs, strong increases are envisaged only for debt service and defence.

  • 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.

Overall, the Federal Government announced a need for action amounting to €13 billion in 2026 and 2027. This will see a very strong rise to €39 billion in 2028. The need for action is reflected in the global spending cuts contained in the fiscal plan. Adjustments are likely to be required in the Climate Fund, too. However, no new fiscal plan has been decided for the fund yet. On the whole, fiscal planning is marked by significant funding shortages. The Federal Government has postponed decisions on how to resolve them.

2.3 State government budgets

2.3.1 Developments so far in 2024 and outlook to 2025

The development of state government finances up to the middle of this year was significantly influenced by special factors in North Rhine-Westphalia. In a deviation from the year before, the state shifted the issuance of grants for basic funding of universities from the second to the first quarter. 18 The state government budget also received €3 billion back from its coronavirus special fund in the second quarter, around twice as much as in the previous year. The core budget balance improved as a result (North Rhine-Westphalia used the funds to repay loans). 19

State government core budgets and off-budget entities recorded an increased deficit in the first quarter, chiefly on account of the aforementioned one-off effect. At €4½ billion, the deficit was €3½ billion larger than one year earlier – excluding the one-off effect stemming from payments to universities in North Rhine-Westphalia, it was only €1 billion larger.

In the second quarter, core budgets increased their surplus to €4 billion, but excluding one-off effects, the result deteriorated (results for off-budget entities are not yet available). The balance improved by €1½ billion compared with the same quarter of the previous year. Revenue went up by 2½%. Although tax revenue saw barely any increase, revenue from public administrations grew sharply (+6 %) due to the payout from the coronavirus special fund in North Rhine-Westphalia. Core budget spending saw muted growth, climbing by 1 %. Personnel expenditure rose strongly (+6 %) as a result of wage adjustments. North Rhine-Westphalia’s move to bring university grants forward to the first quarter curbed expenditure increases, however.

For the year as a whole, the outturn for the core budgets and off-budget entities combined is expected to deteriorate slightly (2023: deficit of just over €½ billion). According to the spring tax estimate, state government tax revenue will go up by 3 %. However, transfers to local government look set to rise more sharply. Growth in the major expenditure item personnel expenditure is likely to be slower in the second half of the year than in the first, when inflation compensation bonuses were being paid out. That said, it is still expected to increase at a significantly stronger pace than tax revenue over the year as a whole.

As things stand today, the federal states’ financial situation is expected to improve somewhat next year. According to the tax estimate, tax revenue will rise by 4 %. If the tax measures from the Federal Government’s growth initiative are implemented, this will also result in revenue shortfalls for the federal states. However, central government is also planning to boost the quality of childcare over an extended period of time, which would alleviate some of the pressure on state governments. Personnel expenditure is expected to grow at a significantly slower pace than in the current year. Looking at transfers to local government, the fact that 2023 tax revenue to be accounted for retroactively was lower than planned is likely to bring some relief.

2.3.2 Federal states’ debt brakes still lack clarity

Following the ruling of the Federal Constitutional Court, some federal states have adjusted their budget plans for 2024; some have declared a state of emergency in order to justify additional borrowing under their debt brakes. Bremen, Schleswig-Holstein, Saxony-Anhalt and Saarland once again declared a state of emergency in order to enact authorisations for new emergency borrowing. The grounds they gave for doing so were the ongoing effects of the pandemic and the consequences of the Russian war of aggression against Ukraine. Schleswig-Holstein also cited flood damage.

Meanwhile, Brandenburg’s second supplementary budget for 2024 no longer provides for new emergency borrowing. The reason for this is a ruling by the state’s constitutional court. It decided at the end of June that the recourse made to emergency borrowing in the state’s original two-year budget of 2023‑24 was invalid. The state is not required to adjust those measures that have already been implemented. However, it appears that the conditions attached to emergency borrowing were too stringent for the government to use it for outstanding measures. The state parliament instead adopted a second 2024 supplementary budget, which now uses reserves for this purpose. State constitutional courts are currently examining the use of emergency borrowing in Bavaria, North Rhine-Westphalia and Saxony. There also appear to be plans in Bremen and Schleswig-Holstein to examine this.

North Rhine-Westphalia is amending how it applies its debt brake: it will take account of cyclical effects in the future and will take on cyclical debt for the first time this year. The state’s debt brake already allows for cyclical new borrowing, but North Rhine-Westphalia has not yet made use of this option. Its draft supplementary budget now justifies borrowing authorisations of €2 billion in response to cyclical burdens. This is consistent with the economic slack estimated by the Federal Government in April 2024. Under the state’s debt brake, cyclical borrowing will be repaid using future cyclical increases in revenue. Such additional revenue will then not be available for other expenditure. In this respect, the arrangement protects against procyclical fiscal policy.

3 Social security funds

3.1 Pension insurance scheme

3.1.1 Outlook for 2024 and 2025

The statutory pension insurance scheme recorded a surplus of just over €1½ billion in the second quarter of 2024. This was €½ billion lower than in the previous year, as central government cut its funds and the number of pensions paid grew markedly. Rising by 5½%, revenue went up sharply. Excluding central government’s funding cut, the rise would have been just under ½ percentage point higher. At 6 %, expenditure growth was even stronger: in addition to the pension adjustment of just over 4½% in mid-2023, this was also because the number of pensions paid rose markedly. 20

Looking at 2024 as a whole, a balanced budget appears possible for the pension insurance scheme (previous year: +€1½ billion). The surplus shrank by €1 billion year on year in the first half of 2024. However, the outlook for the second half of the year is less negative. In particular, earnings subject to compulsory contributions are expected to increasingly take the place of tax and social contribution-exempt inflation compensation bonuses. Contributions are therefore likely to grow significantly more strongly in the second half of the year. At 4½%, the pension adjustment in July was also slightly weaker than in the previous year. These two factors are likely to markedly outweigh the additional expenditure on pensions for reduced earning capacity. Since July 2024, the pension insurance scheme has been paying a flat-rate supplement to persons who began drawing their reduced earning capacity pensions between 2001 and 2018. This supplement is expected to cost almost €1½ billion in the second half of the year. As in the first half of the year, the reduction in central government funds will lower the budget balance by just over €½ billion.

A deficit is expected next year. This is because expenditure is likely to see further fairly dynamic growth. The pension adjustment in mid-2025 is expected to be on a par with this year’s and, due to demographic factors, the number of pensions paid is set to increase markedly. This will be accompanied by additional expenditure of another almost €1½ billion on the supplement to pensions for reduced earning capacity that was introduced in 2024. Contribution receipts are also likely to grow at a continued strong pace, partly on account of tax and social contribution-exempt inflation compensation bonuses no longer being paid out (see above). However, central government’s draft budget for 2025 envisages an ad hoc cut of just over €1 billion in central government funds (see Plans for 2025). Central government had already reduced its funding by just over €1 billion per year for the years 2024 to 2027 in order to relieve the pressure on its budget. Such ad hoc cuts in central government funding based on its budgetary situation will ultimately put pressure on future contribution payers, as the pension insurance scheme’s reserves are being depleted more quickly. Overall, confidence in the pension insurance scheme could be strengthened if central government made funds available subject to clear rules. 21

3.1.2 Reform options to strengthen the potential labour force

The Federal Government intends to make working beyond the statutory retirement age more financially attractive. It intends to completely exempt employees’ wages and salaries from contributions to the pension and unemployment insurance schemes once they have passed the statutory retirement age. At present, only the employee contribution is no longer payable in such circumstances. Government plans would see remuneration generally being paid to the insured person in full in future, i.e. without deducting the employer contribution either. This makes sense, as the employer contribution has thus far been a special levy for such employees: employees do not initially accrue any additional entitlements in this way. They can acquire additional entitlements exclusively in the statutory pension insurance scheme (not in the unemployment insurance scheme) by insuring themselves on a voluntary basis. If they do so, they must pay both the employer and employee contributions to the statutory pension insurance scheme. This option should remain in place if the change is implemented.

In addition, the Federal Government plans to give employees who postpone their retirement the choice between two types of pension benefits in future:

  • 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).

Overall, there is a strong case for not giving this special employment status and advance pension payments preferential tax treatment over other employment and pensions. A plausible move would be to remove any disincentives or obstacles to employment beyond the statutory retirement age. To this end, the supplements, in particular, would have to be formulated appropriately in actuarial terms.

It would be advisable to dismantle existing early retirement incentives and to link the statutory retirement age after 2030 to life expectancy. At present, full pensions without any deductions after 45 years of contributions are a financial incentive for early retirement, and the deductions for early retirement could be set too low. 22 Moreover, there are no plans to raise the statutory retirement age further after 2030. The latter will lead to an ever-decreasing ratio of years of employment to years of retirement as life expectancy rises. It would make more sense to change these two factors rather than to combat them with special tax advantages. This would mean ending the option of early retirement without any deductions and applying deductions that are appropriate in actuarial terms. After 2030, the statutory retirement age could be linked to life expectancy. These measures will consistently promote longer working lives as life expectancy increases. They will support economic growth and the government revenue base and curb pension expenditure. In this way, they will reduce the funding pressure on the statutory pension insurance scheme and the central government budget, in particular. This will be all the more important if the minimum threshold for the replacement rate is extended beyond 2025. The reason for this is that it would further increase the pressure on the contribution rate and central government finances. Meanwhile, generational capital will bring in only a small amount of additional revenue, and this will not be until 2035 onwards. 23

3.2 Federal Employment Agency

The Federal Employment Agency reported a small deficit in the second quarter of 2024. In the same quarter of the previous year, it had posted a surplus of just over €½ billion. This was due to a sharp increase in expenditure, particularly on unemployment benefits (+18 %) and active labour market policy (+14 %). Spending on insolvency benefit was less extensive. However, starting from the already highly elevated level of the previous year, it ramped up further still. This resulted in a deficit of just under €½ billion for insolvency benefit in the second quarter of 2024. Administrative expenditure also shot up, with the Federal Employment Agency raising transfers to its civil servants’ pension fund sharply. 24 At 6 %, Federal Employment Agency revenue also grew substantially, but to a much lesser extent than expenditure.

The Federal Employment Agency may run a surplus for the year as a whole. In year-on-year terms (2023: +€3 billion), however, this will constitute a significant deterioration. According to the plans, revenue will increase by 5½%. This is consistent with the growth after the first half of the year. In the second half of the year, contributions could increase somewhat more strongly, with earnings subject to compulsory contributions increasingly taking the place of tax and social contribution-exempt inflation compensation bonuses. However, expenditure is likely to continue rising at a significantly stronger pace than revenue: the increase in unemployment benefits is not yet letting up and active labour market policy expenditure remains high.

List of references

Deutsche Bundesbank (2024a), German government budget in times of crisis – developments in the period 2020 to 2023, Monthly Report, February 2024, pp. 59‑64.

Deutsche Bundesbank (2024b), Public finances, Monthly Report, May 2024.

Deutsche Bundesbank (2024c), Public finances, Monthly Report, February 2024, pp. 57‑82.

Deutsche Bundesbank (2023), Public finance, Monthly Report, November 2023, pp. 61‑85.

Deutsche Bundesbank (2022), Inflation-induced bracket creep in the income tax scale, Monthly Report, June 2022, pp. 63‑73.

Deutsche Bundesbank (2021), Federal debt: allocate premia on accruals basis in budgetary interest expenditure, Monthly Report, June 2021, pp. 47‑51.

Deutsche Bundesbank (2016), Key central government budget data in connection with the debt brake, Monthly Report, February 2016, pp. 68‑69.

Deutsche Bundesbank (2011), The debt brake in Germany – key aspects and implementation, Monthly Report, October 2011, pp. 15‑39.

Deutscher Bundestag (2024), Entwurf eines Gesetzes über die Feststellung des Bundeshaushaltsplans für das Haushaltsjahr 2025, Drucksache 20/12400.

Federal Ministry of Finance (2024), Bundesregierung gleicht Mehrbedarfe im Kernhaushalt 2024 sowie im Klima- und Transformationsfonds aus, press release No 12/2024, July 2024.

Pimpertz, J. (2023), „Versicherungsmathematisch faire” Abschläge bei vorgezogenem Rentenbezug – eine systematische Betrachtung der Budget-, Belastungs- und Anreizneutralität, in IW-Trends, Vol. 49, No 4, January 2023, pp. 85‑105.

Social Advisory Council (2023), Gutachten des Sozialbeirats, Jahresgutachten 2023, November 2023.

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