1 General government budget[1]

1.1 Outlook for 2025 and the medium term

With the easing of the budget rules, German fiscal policy is changing its course: the deficit and debt ratios are likely to rise significantly over the next few years. At the end of the last legislative period, legislators considerably expanded the scope for borrowing under the debt brake. In addition, they approved a very extensive lending framework for a new debt-financed special fund for infrastructure and climate neutrality (see the supplementary information entitled “Stability-oriented adaptation of relaxed debt brake”).

The new Federal Government intends to make use of the additional scope for borrowing and to steer towards an expansionary fiscal policy pursuant to the coalition agreement.[2] The coalition agreement envisages considerable additional expenditure, particularly for defence and government infrastructure. In addition, higher subsidies and pensions have been agreed. Demographic-related spending pressure will also compound the situation. All in all, then, the structural expenditure ratio could far exceed 50 % in the coming years. On the revenue side, the ratio of taxes and social contributions in relation to nominal GDP is set to increase significantly. The contribution rates to the pension, health and long-term care insurance schemes will rise further in the future as their expenditure sees dynamic growth. Taken together, the contribution rates to the social security funds are likely to exceed 42 % this year. Rising contribution rates will probably outweigh planned tax cuts.

However, the deficit ratio could initially see a further slight fall this year on account of marked tax revenue growth and steeply rising social contribution rates (2024 deficit ratio: 2.8 %). While the weakness in the real economy is weighing on tax revenue, bolstering factors are making an equal impact (see the section on the official tax estimate). In addition, the health insurance institutions sharply increased their supplementary contribution rates at the beginning of the year in order to close financing gaps from last year and replenish reserves. The deficit in the social security funds is therefore likely to decline in spite of dynamic expenditure growth. The fundamental fiscal realignment announced by the new government is not expected to play a major role in 2025, as it will require time to implement.

From next year onwards, the deficit ratio will probably rise significantly, chiefly driven by a raft of central government measures (see also “Fiscal policy realigned in coalition agreement”). However, deficits are also expected to persist for state governments, including local governments. State governments are likely to make use of the new structural scope for borrowing. The social security funds are also likely to record deficits overall up to around 2027, mainly due to financing gaps in the pension insurance scheme.[3] All in all, the general government deficit ratio could reach around 4 % in structural terms in 2027.

At 62.5 % in 2024, the Maastricht debt ratio was not far above the 60 % reference value. It will rise markedly in the coming years – as will interest expenditure. The debt ratio could rise past 65 % by 2027. On top of this is Germany’s share of EU debt.[4] This is expected to rise to 2½ % of GDP by the end of the current programme on account of debt-financed NGEU grants. Government interest expenditure will also climb, also because the average rate of interest payable on debt continues to rise. It has been increasing again for several years now, standing at 1.7 % last year. Prior to this, it had fallen to an exceptionally low 0.9 % during the lengthy zero interest rate period.

1.2 Fiscal policy realigned in coalition agreement

Germany is facing major challenges, not least in view of significant international upheavals. Against this backdrop, the new Federal Government is planning to implement a number of measures. Specific legislative proposals have not yet been released, but the direction the government intends to take is indicated in the coalition agreement. Additional government funding is to be channelled into defence and infrastructure. In addition, the coalition agreement has set the promotion of research, innovation and digitalisation as a priority. Selective tax relief and subsidies are intended to bolster business investment and labour supply. Furthermore, administrative processes are to become faster, more digital and less bureaucratic in future.[5]

Many of the above-mentioned projects are headed in the right direction in terms of making Germany ready for what the future holds. Everything now depends on their implementation. One welcome development, for example, is that the new Federal Government wants to speed up, bundle and simplify administrative processes across government levels. To this end, it wants to make better use of the opportunities afforded by digitalisation (see also the section “Federal states – 2024 result and outlook”). As the example illustrates, drawing on the available financial resources will not suffice. Rather, it is also essential to better gear the underlying structures to the challenges at hand. Ultimately, it is imperative that the projects are implemented swiftly and efficiently.

It remains important that the tax and transfer systems be reviewed and the social security funds be adjusted to the demographic outlook. The newly planned measures will also entail considerable spending pressures, and social contribution rates are set to rise in any case due to demographic change. In this respect, the fact that the new Federal Government intends to review existing subsidies and specific concessions comes as welcome news. However, the plans for this review remain general in the coalition agreement, whilst a number of new relief measures have already been announced concretely. Overall, the government would be well advised to thoroughly justify specific new concessions and relief measures or forgo them entirely, in view of the pressing challenges at hand. There is much to be said for either reviewing specific concessions on a regular basis or restricting their duration at the outset. Generally speaking, the tax and transfer system can be made more efficient by establishing broader tax bases with lower tax rates and more targeted, consistent transfer systems. This would also reduce the bureaucratic burden. The opposite would be true if specific exceptional cases are implemented, however. In addition, the Federal Government could follow the frequently recommended approaches for employment-friendly reforms in the tax system and in the social security funds (see also “The economy is expected to more or less stagnate in the second quarter” in the chapter The German economy as well as the sections “Tax policy measures in the coalition agreement” and “Pension policy plans of the new Federal Government” below).

A consistent and targeted framework is still needed in order to achieve decarbonisation and a secure, cost-efficient energy supply.From an economic point of view, energy prices that reflect scarcities are recommended, as they balance supply and demand in a cost-effective manner.[6] Scarcity-based electricity prices should reflect not only bottlenecks and oversupply in electricity production, but also the degree of grid utilisation. This is an argument against the announced subsidisation of grid fees. Emissions allowances are a way of sending scarcity-related price signals encouraging decarbonisation. However, in order to achieve the decarbonisation targets, prices must not then be systematically capped (for information on the energy transition, see “The economy is expected to more or less stagnate in the second quarter” in the chapter The German economy).

1.3 Use upcoming legislative changes to agree on reliable guard rails for sustainable fiscal policy

Persistently large-scale deficits and a corresponding rise in the debt ratio would not be compatible with sound public finances or EU rules. In the medium term, considerable deficits are set to emerge (see “Outlook for 2025 and the medium term” above). Although, for a time, they will not jeopardise sound German public finances, it will be a different story if they persist: rising and high interest burdens would severely restrict fiscal room to manoeuvre, and high debt ratios would erode the resilience of public finances. The EU rules – including EU treaty provisions – generally aim to lower debt ratios that exceed 60 % – and for good reason. Binding EU fiscal rules are a key anchor for sound public finances and a stability-oriented monetary union.

In order for German public finances to have a robust outlook, there must also be clarity with regard to the specific requirements of the national and EU fiscal rules. This clarity is currently lacking. The reformed national budget rules allow for large-scale borrowing, but implementing acts (see the supplementary information entitled “Stability-oriented adaptation of relaxed debt brake”) and up-to-date budget plans are still lacking. The specific EU requirements for Germany are not yet certain, either: for one thing, no fiscal plan is available for the current four to seven-year adjustment period, as things stand. For another, it remains unclear what exactly the transitional period resulting from the requested escape clause activation means for spending scope (see the supplementary information entitled “EU fiscal rules: proposed activation of national escape clauses”). Overall, the new German and European fiscal rules are very complex, and their practical application is difficult to comprehend. This makes transparent budget plans all the more important. In particular, these plans need to indicate how the expanded national leeway is set to be used and ensure that this lines up with the EU requirements. It is not merely the plans for the next respective year that will have a bearing here – indeed, plans are also needed regarding the implementation of future adjustment needs.

Following a transitional phase, it is to be expected that, in line with the EU requirements, Germany will first have to aim for a structural deficit ratio of around 1 % in order to bring the debt ratio back below 60 %.[7] This means that, going forward, the EU rules will become much more tightly binding than the national scope for borrowing under the Basic Law: a structural deficit ratio of 1 % will already almost fully exhaust the new infrastructure fund’s annual average scope for borrowing. In future, it will therefore only be possible to utilise a certain fraction of the national borrowing potential.

Central and state governments should already be anticipating their future return to a sound structural footing in their upcoming planning.The expected target of around 1 % for the structural general government deficit ratio means that they will have to reduce initially higher deficits over a period of time. It would be advisable for them to limit the potential need for corrections from the outset. To this end, they could reserve the new scope for borrowing for measures addressing the challenges of defence and infrastructure investment (including climate neutrality) that go beyond what was achieved in 2024. Other additional measures would then have to be counterfinanced.

It is recommended that the forthcoming legislation on the amended debt brake once more lays out reliable guard rails for Germany’s public finances. The constitutional amendments of March 2025 still need to be fleshed out in more detail by means of implementing acts. It may be enshrined in the implementing legislation that the new scope for borrowing should be reserved solely for additional measures addressing the challenges of defence and infrastructure investment (including climate neutrality), as described above. In other words, the area of application and additionality could be specifically safeguarded. In this context, central and state governments could set out how they will bring their common national scope for borrowing for the current transition phase into line with the (yet to be agreed) EU provisions on the fiscal plan and escape clause. The coalition agreement has also announced a further reform of the debt brake. In this context, sound public finances and the objectives of the EU rules could be re-anchored in the Basic Law by setting more comprehensive and binding credit limits. The Bundesbank’s proposals for a fundamental reform of the debt brake continue to provide suitable starting points for this: they aim at prioritising government investment (in infrastructure and defence) as well as safeguarding sound public finances and the EU rules.[8]

EU fiscal rules: proposed activation of national escape clauses

The Member States of the EU want to significantly strengthen their defence capabilities. To this end, the European Commission is calling for mobilisation of up to €800 billion in additional defence spending over the course of four years. The Commission’s “Readiness 2030” proposal is made up of three pillars: (i) loans funded by joint EU borrowing (SAFE), (ii) mobilisation of private capital with the help of the European Investment Bank, and (iii) higher spending financed at the national level. The plan envisages that the largest share of this ramp-up in expenditure will be driven by nationally financed spending, at four-fifths. To facilitate this, the usual limits set out in the European fiscal rules are to be temporarily eased.[1]

The European fiscal rules include a national escape clause that expands a Member State’s fiscal space. The escape clause can only be activated in the event of exceptional circumstances that are outside the control of the Member State and have a major impact on its public finances.[2] If the escape clause is activated, the Member State is allowed to spend more than agreed in its fiscal plan.[3] Even if this extra spending pushes their deficit ratio above 3 %, it will usually not lead to an excessive deficit procedure. The rules also stipulate that the higher net expenditure (and deficits) arising from application of the escape clause must not pose a danger to the medium-term sustainability of public finances.

The Council of the European Union and the European Commission have proposed that all Member States request activation of the national escape clause.[4] They explain that Russia’s war of aggression is a threat to European security and constitutes an exceptional circumstance within the meaning of the escape clause provision. While the clause is country-specific, they argue that all Member States are affected by the threat and there is a need to up the EU’s defence capabilities. With this in mind, the Council and the Commission have called for all Member States to request activation of the escape clause. The Commission intends to have recommendations in favour of activation of the national escape clauses ready for the Council in early June. The Council could decide on their adoption in July.[5]

The Council and the Commission are recommending a kind of “standardised use” of the escape clause with three specific constraints:

Deviations from the fiscal plans will only be permitted for additional defence expenditure. All other growth in expenditure must remain within the confines of the limits agreed in the fiscal plans.[6] Failure to comply risks triggering procedural steps.
The amount of additional debt-financed defence expenditure will be subject to limits. This is the Commission’s way of ensuring that public finances remain in sustainable shape over the medium term. To this end, it is proposing a blanket limit of 1.5 % of GDP per year. It intends to measure the size of additional expenditure by comparing it against the level for defence spending in 2021.[7] Member States will be able to utilise any unused fiscal space even after the escape clause has expired: this option will exist in cases where relevant expenditure commitments were made in a year falling within the activation period (and provided that the 1.5 % limit is still not exceeded even if said commitments are factored in).
The escape clause will be limited in time. It is to apply for four years, from 2025 to 2028. Defence spending will then need to go back to being financed without reliance on exceptions to the deficit rules. That said, the Council could extend the escape clause on a recurring basis.

The implementation is still unclear in terms of detail. This applies inter alia to the budget limits that will apply to Member States once the activation period comes to an end. A coherent approach would be for their net expenditure to fall back to the level it would have been scheduled to reach had the escape clause not been activated. This would row back the more expansionary stance of fiscal policy pursued for a time. In this case, and with all other conditions unchanged, the expected debt ratios would be similar to those originally planned – albeit higher by the sum of the debt-financed additional defence spending and the resulting interest expenditure. By contrast, a less stringent approach would be to require Member States to bring expenditure growth back into line with the originally agreed annual growth rates once the escape clause expires. These growth rates would then start at a higher baseline level of expenditure due to the additional defence spending. This would mean that all subsequent years would see higher annual expenditure and deficits than originally planned – and, correspondingly, higher debt levels than envisaged in the original plans, too (a “ski jump” effect). A similar effect would arise if new fiscal plans based on the previous year’s temporarily increased deficit ratios were agreed before or at the end of the activation period.[8]

Fundamentally speaking, activating the escape clause in order to allow additional spending on defence is an appropriate step in these exceptional circumstances. It is right and important that the Commission is proposing limits to the higher-than-usual debt-financed expenditure. By devising a standard template for the exception to the rules, they are taking a pragmatic approach to the issue. However, there is much to suggest that Member States with very high levels of debt should not fully exploit the scope provided for in the standard. As the escape clause is country-specific it should, conversely, also be possible to agree higher limits than in the standard case – provided there are good reasons for doing so. At any rate, it is important that all Member States return to their regular net expenditure path once the activation period is over.

The Federal Government still needs to reach agreement with the EU bodies on the EU's requirements for Germany and incorporate those requirements into its general government fiscal planning at the domestic level.

Germany should agree on a fiscal plan that implements the EU requirements in a strict fashion. This plan has to be drawn up without factoring in the scope supplied by the escape clause. It is not yet clear what the applicable budget limits will be. The European rules require that fiscal plans set a course that will leave the country in question on a sound footing at the end of the adjustment period. In particular, this footing must ensure that the debt ratio falls towards 60 %. In Germany's case, it is likely that – under plausible assumptions – the country will need to set its sights on a structural deficit of around 1 % of GDP.[9]
In addition, agreement would need to be reached on the use of a country-specific escape clause. In principle, it could also allow additional expenditure to exceed 1.5 % of GDP . As this is a country-specific clause, Member States should be allowed to deviate from the standard template in specific cases (where there are exceptional circumstances outside the control of the Member State exerting an impact on public finances). The Federal Government would then have to provide a reasoned justification for this – perhaps by reference to a particularly high need for additional spending on defence. Responsibility for granting approval would then fall to the competent EU bodies.

Once the escape clause activation period has ended, Germany, like all other Member States, must return to the net expenditure path laid out in its fiscal plan. Germany will then once again have to counterfinance any structurally higher expenditure – say, in the field of defence (see the supplementary information entitled “Stability-oriented adaptation of relaxed debt brake”).

See European Commission (2025a).
See Regulation (EU) 2024/1263. The rules also contain a general escape clause. This can be brought to bear in the event of a severe economic downturn in the euro area or the Union as a whole.
Member States draw up a national medium-term fiscal-structural plan, which the Council must approve. Amongst other things, that plan maps out a path for the amount by which net nationally financed primary expenditure will be allowed to grow over a four to seven-year “adjustment period”. These annual net expenditure growth rates are used as the basis for measuring budgetary outcomes. Under the corrective arm, too – when a Member State is subject to an excessive deficit procedure – it has to adhere to a net expenditure path. In the remainder of this information box we use the term “fiscal plan” to cover all cases. See Deutsche Bundesbank (2023a).
See Council of the European Union (2025).
See European Commission (2025b).
In actual fact, however, countries with binding safeguards will end up with additional fiscal space. This is because limits for fiscal plans arising from the safeguards are to be rendered non-binding when the escape clause is active.
The 2021 reference point is of relevance for countries that increased their defence spending in the period from 2022 to 2024. Countries which did so will be able to use the fiscal space provided by the escape clause to increase other expenditure.
With or without an escape clause, the “actual” trajectory of the debt ratio can turn out to be markedly less favourable than the “planned” path. This does not trigger procedural consequences if, for instance, it results from overly optimistic macroeconomic assumptions at the planning stage. Core assumptions have to do with nominal GDP growth and interest rates. However, even if the assumptions used prove accurate, it is possible for a debt ratio to fall much slower than planned. This does not necessarily have procedural consequences either. Procedural consequences are not instituted if net expenditure is higher than agreed but remains within the limits of the control account. The ECB has drawn attention to this important point. See European Central Bank (2025).
See Deutsche Bundesbank (2025b). The footing must take account of the future (further) rise in ageing-related costs. It is generally somewhat higher in the case of longer adjustment periods. Adjustment periods can span a period of four to seven years. A period longer than four years requires the country in question to plan and implement investment and reforms.

2 Central, state and local government

2.1 Tax revenue

2.1.1 First quarter of 2025

Taxes saw dynamic growth in the first quarter (+9½ % or €19 billion on the year; see Chart 5.1 and Table 5.1). One-off factors accelerated the already significant growth. Withholding tax on interest income and capital gains, for instance, contributed around one-fifth of the increase, though they make up a relatively small share of revenue. This is likely to have been due, not least, to higher capital gains. By contrast, interest income on deposits probably contributed less to this growth than in the previous year. This is because the interest rate level and investment volume barely changed on the year. In the case of wage tax (+7½ %), taxable wage elements probably replaced tax-free inflation compensation bonuses, thus bolstering revenue. This effect is likely to ease later in the year. Energy tax also recorded high growth. This was due to a one-off effect, as amounts for the fourth quarter of 2024 did not flow in until the beginning of 2025. Corporate tax also recorded an increase in the first quarter, but this was solely due to an improvement in the balance of back-payments and refunds for previous periods. VAT, which fluctuates throughout the year, also made a considerable contribution to growth.

Tax revenue

**Table 5.1: Tax revenue**
Type of tax	Q1			Estimate for 2025¹
	2024	2025		Estimate for 2025¹
	€ billion		Year-on-year change %	Year-on-year change %
Tax revenue
Total²	203.0	222.3	+ 9.5	+ 3.7
of which:
Wage tax³	57.1	61.3	+ 7.4	+ 4.4
Profit-related taxes	40.3	45.3	+ 12.2	− 0.7
of which:
Assessed income tax⁴	19.1	20.1	+ 5.1	+ 0.3
Corporation tax⁵	10.1	10.6	+ 4.9	− 10.0
Non-assessed taxes on earnings	5.5	5.4	− 2.4	− 4.9
Withholding tax on interest income and capital gains	5.6	9.2	+ 64.6	+ 22.0
VAT⁶	73.6	79.0	+ 7.3	+ 3.2
Other consumption-related taxes⁷	21.9	25.3	+ 15.6	+ 7.8
Sources: Federal Ministry of Finance, Working Party on Tax Revenue Estimates and Bundesbank calculations. 1 According to official tax estimate of May 2025. 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. 6VAT 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.

2.1.2 Tax estimate projects solid growth up to 2029; downward revision resulting from tax cuts and subdued profit developments

The new official tax estimate forecasts that tax revenue in 2025 will rise by 3½ % on the year. Growth will be bolstered significantly by the fact that taxable wage elements will come to replace tax-free inflation compensation bonuses. Receipts from withholding tax on interest income and capital gains as well as inheritance tax will also see a strong increase.

Wage tax revenue will rise by 4½ %, roughly in line with the increase in gross wages and salaries. The effect of the inflation compensation bonuses mentioned above is likely to bolster growth by around 3½ percentage points. Compensation for the bracket creep of the previous year and the retroactive increase in the basic tax allowance for the past year will roughly offset (price and real wage-induced) income tax bracket creep in the current year. In addition to further burdens stemming from changes in tax legislation, higher health insurance contributions will reduce tax receipts via the deduction of wage tax.

On the whole, taxes on income are set to stagnate (-½ %). Corporation tax will fall sharply, but the strong increase in withholding tax on interest income and capital gains will compensate for this (for information on the withholding tax, see “First quarter of 2025” above). The forecast for corporation tax takes into account the fact that advance payments, which are a major item, have fallen sharply over the course of the year so far. This is likely to be due in part to the fact that large, export-oriented enterprises have been experiencing weak profit developments of late. Revenue from assessed income tax is seeing more stable growth. This is partly because, with the transition to deferred taxation, pension receipts will increasingly be taxable. Furthermore, the profits of non-corporations, whose business operations are more frequently inward-looking and domestic market-focused, currently appear to be developing more favourably than those of large, export-oriented corporations. On balance, income tax revenue will be dampened considerably by legislative changes – above all the aforementioned compensation for bracket creep.

VAT revenue will rise by 3 %, which is roughly in line with the growth projected for private consumption and taxable government expenditure. This assumes that growth will weaken significantly over the remainder of the year: an assumption that seems plausible, partly because the positive base effect resulting from temporary tax cuts no longer in force is concentrated in the first quarter.

For 2026, the tax estimate projects revenue growth of 2½ %. The nominal macroeconomic assumptions, taken in isolation, will lead to slightly faster revenue growth. However, legislative changes will reduce growth slightly on balance: further compensation for bracket creep will be the chief factor here. Steeply declining withholding tax on interest income and capital gains as well as on inheritance tax, for which the high 2025 levels will not be carried forward, are another significant element.

According to the tax estimate, revenue is projected to rise by an average of 3½ % in the years 2027 to 2029. The increases are driven primarily by nominal macroeconomic growth assumptions and fiscal drag. In 2028 and 2029, revenue will rise somewhat more slowly on the basis of higher expected pension contributions. This will reduce taxable income when it comes to the deduction of wage tax.

The tax estimate does not yet take into account tax cuts that are under consideration but still awaiting approval. These would result in significant revenue shortfalls from 2026 onwards. Taken together, specific measures set out in the coalition agreement thus far and the continued compensation for bracket creep could reduce growth from 2026 onwards by around 1½ percentage points per year. Fairly concrete plans that have already been announced include, in particular, accelerated depreciation, an electricity tax cut, a VAT cut for food in restaurants and incremental reductions in corporation tax as from 2028. From 2029 onwards, these projects will probably no longer represent such a burden on annual growth rates.

Compared with the October 2024 tax estimate, revenue shortfalls of €81 billion are set to accumulate up to 2029. This is not surprising, however, as this is on the back of tax cuts. Compensation for bracket creep is the main purpose of these cuts. Less favourable macroeconomic assumptions also contribute to the downward revision, particularly for entrepreneurial and investment income. Overall, according to the official estimate, significantly lower revenue from income-related taxes is to be expected, in particular. VAT revenue, on the other hand, was corrected upwards – primarily due to the annual result for 2024, which is better than was expected at the time. In 2025, a number of temporary one-off developments will also largely offset the aforementioned burdens – especially in the case of withholding tax and inheritance tax.

**Table 5.2: Official tax estimate figures and the Federal Government’s macroeconomic projections**
Item	2024	2025	2026	2027	2028	2029
Tax revenue¹
€ billion	947.7	979.7	1,005.8	1,042.9	1,078.8	1,113.0
% of GDP	22.0	22.3	22.2	22.4	22.5	22.5
Year-on-year change (%)	3.5	3.4	2.7	3.7	3.4	3.2
Revision compared with previous tax estimate (€ billion)	6.1	− 2.7	− 19.1	− 20.3	− 18.3	− 20.8
Memo item: Revenue shortfalls due to envisaged tax relief (€ billion)
Selected legislative changes from the coalition agreement²	.	.	− 14.3	− 22.7	− 31.1	− 30.5
Revenue shortfalls if bracket creep is compensated for in same manner as	.	.	.	− 5.7	− 11.9	− 18.2
Real GDP growth (%)
Spring projection (April 2025)	− 0.2	0.0	1.0	1.0	1.0	1.0
Autumn projection (October 2024)	− 0.2	1.1	1.6	0.9	0.9	0.9
Nominal GDP growth (%)
Spring projection (April 2025)	2.9	2.0	3.0	3.0	3.0	3.0
Autumn projection (October 2024)	3.0	3.0	3.5	2.9	2.9	2.9
Sources: Working Party on Tax Revenue Estimates, Federal Ministry for Economic Affairs and Energy and Bundesbank calculations. 1 Including EU shares in German tax revenue, including customs duties, including receipts from local government taxes. 2 Bundesbank calculations on the basis of the coalition agreement, in particular accelerated depreciation, electricity tax cut, incremental reduction in corporation tax as from 2028 and the VAT cut for food in restaurants. 3 Since 2014, the income tax scale has been shifted year after year, usually in line with the estimated inflation of the previous year. The figures shown here are the revenue shortfalls that will result if this practice is continued and the basic income tax allowance also shifts in line with the inflation rate of the previous year in each case. The effects are roughly estimated and are based on the Federal Government's current spring projection and wage tax receipts based on the current tax estimate. They are stated as defined in the national accounts.

2.1.3 Tax policy measures in the coalition agreement

The coalition agreement envisages tax relief for enterprises in order to improve investment conditions and the attractiveness of Germany as an investment location. However, some of the measures are only planned for the next legislative period. In the current legislative period, enterprises will already be allowed to write down investment in machinery and equipment made between 2025 and 2027 more quickly. This measure will improve investment conditions. From 2028 onwards, the corporation tax rate is set to fall by 1 percentage point per year from its current level of 15 % to 10 % in 2032. Germany currently has one of the highest corporation tax rates in Europe. The steps planned to reduce this are intended to make Germany more attractive as a corporate investment location. At the same time, they give an incentive to bring investments forward in order to still be able to write some of them off in line with the higher tax rates.

The relief for enterprises is likely to be accompanied by considerable revenue shortfalls. In the case of corporation tax, a 1 percentage point reduction in the tax rate will result in losses of just under €5 billion per year in mathematical terms (including the solidarity surcharge). Taxpayers’ right to choose between income tax filing options could increase these losses. Under these rights, non-corporations can opt to be treated as corporations. This option is likely to become more attractive with the reduction in corporation tax. The accelerated write-downs are initially expected to result in significant tax revenue shortfalls as from 2026. In the medium term, however, these will probably already lessen, ultimately giving way to additional receipts (relative to the status quo of straight-line depreciation). In principle, these additional receipts should, on balance, offset the revenue shortfalls previously incurred over the long term. From a corporate perspective, however, the interplay between accelerated write-downs and the lower corporate tax rate could provide additional relief from 2028 onwards.

The government is also aiming to lower income tax rates towards the middle of the legislative period. However, this project is expressly conditional on sufficient funding, and no concrete proposals have been set out yet. The solidarity surcharge, on the other hand, will continue to be levied.

In addition, the new government intends to introduce or extend various other tax incentives. Of these, the planned VAT cut on food in restaurants is the most financially significant. Alongside this, the government wants to raise the standard travel allowance and make overtime premiums exempt from income tax. In addition, pensioners’ labour income is to become tax-exempt up to a threshold of €24,000 a year (referred to as an “active pension”). The Federal Government is also planning to introduce tax privileges with regard to bonuses awarded for increasing working hours. A saving promotion is to be introduced for children. Finally, there are plans to fully reinstate the agricultural diesel subsidy and to reduce taxes on air traffic.

That said, it would be more prudent to critically review existing tax subsidies and possibly reduce these. This is because individual provisions and exceptions make tax law complicated and increase the bureaucratic burden.[9] There are plans for a review, but thus far, there is neither a schedule for this nor a list of regulations that will be considered.

Moreover, the Federal Government should structure the tax system effectively and efficiently so that preventable tax burdens do not materialise. Fairly low tax rates and a broad tax base would be advisable here.[10] In this way, the government could provide greater relief to the economy and to households by abandoning existing subsidies following critical review[11] and forgoing new tax exemptions. It could then lower income taxation earlier and more comprehensively, for example.

2.2 Central government finances

2.2.1 First quarter of 2025

The central government deficit including off-budget entities[12] in the first quarter of 2025 was slightly lower on the year. It fell by €2½ billion to slightly more than €11 billion. This decrease mainly affected the core budget.

Fiscal balance of central government's core budget

The core budget deficit contracted by slightly more than €1½ billion to just under €7 billion. Tax revenue rose sharply, by almost 11 % (+€10 billion), with one-off effects boosting growth here (see the section on taxes). Spending rose slightly less strongly, by just under 8½ %. In terms of current expenditure, grants saw particularly strong growth (+€3 billion). Alongside higher payments to the pension insurance scheme, the fact that central government has taken over the payment of subsidies for climate-friendly electricity from the Climate Fund was also a factor. Interest expenditure declined slightly (-€½ billion): expenditure dropped by €2 billion due to the switch to accruals-based accounting of discounts, but this was almost offset by considerable additional burdens resulting from the refunding of Federal securities. Indeed, investment spending actually rose by €5 billion. This was mainly attributable to the first tranche of this year’s capital injections to Deutsche Bahn, which are intended for infrastructural expansion. Under the debt brake, such payments are booked by central government as financial transactions. They are thus exempted from the borrowing limit, even though infrastructural expansion ultimately weighs on the Maastricht deficit.

Fiscal balances of central government's off-budget entities

The off-budget entities’ first-quarter deficit was down slightly on the year to €4½ billion.

A significant fall of €3 billion brought the Climate Fund’s deficit down to €2½ billion. This decline reflected the fact that subsidies for green electricity are now being paid from the central government’s core budget; a year earlier, the Climate Fund had still paid out €3 billion for these subsidies.
The Armed Forces Fund’s deficit saw a moderate increase of €½ billion to just under €3 billion.
The Economic Stabilisation Fund recorded a balanced budget; a year earlier it had posted a surplus stemming from repayments of assistance loans.

2.2.2 Outlook for 2025 and beyond

In March, federal legislators substantially loosened the Federal Government’s debt brake, which is enshrined in the Basic Law. Defence-related expenditure above 1 % of GDP is now exempted from the debt brake, in terms of both size and duration. In addition, a total of €500 billion in extra borrowing is to be permitted for additional investment in infrastructure and climate protection over a period of 12 years. Important details have yet to be clarified, and the EU rules must ultimately also be followed (see the supplementary information entitled “Stability-oriented adaptation of relaxed debt brake” for more details).

In light of the amendment to the Basic Law, high borrowing scope looks set to be a feature of the 2025 central government budget and the plans for the following years. The financial burdens arising from the new Federal Government’s coalition agreement are likely to be relatively limited in 2025:[13] the projects first need to be written into law and then set in motion. Nonetheless, the decline in the deficit observed at the start of the year will probably turn into a considerable expansion over the remainder of the year. The Federal Minister of Finance announced that, by the end of June, the cabinet would present a draft for the 2025 central government budget and benchmark figures for the following years.

Stability-oriented adaptation of relaxed debt brake

1 Overview

Germany is facing major challenges in the areas of defence and infrastructure. These issues must be addressed with resolve. The easing of the debt brake in March created extensive scope for borrowing for this purpose. It is now crucial that the funds be deployed quickly, effectively and economically. To this end, the planning and approval processes and the awarding of contracts for government investment must be accelerated, as well as the procurement of military equipment. It is an encouraging sign that this is exactly what the coalition agreement is calling for.

Increased government borrowing is justifiable in the current situation, but public finances must remain sound and EU rules must be respected. This is, first of all, a strong argument in favour of using the substantially increased borrowing scope specifically and solely for the designated objectives. Any other measures that would put a strain on the budget would need to be financed through other means or postponed. Second, deficits would, in the medium term, need to be brought back to a level compatible with sound government finances and in line with EU rules. Permanently higher expenditures for defence and infrastructure would thus have to be gradually offset by corresponding funding measures. Third, a comprehensive reform of the debt brake should establish new limits on borrowing after a transitional phase, which would ensure stability and safeguard core EU requirements. In early March, the Bundesbank presented proposals to modify the debt brake accordingly and at the same time strengthen public investment.

2 The new borrowing options

The amendments to the Basic Law significantly expand the scope for borrowing to fund measures in the areas of defence, infrastructure and decarbonisation. The new scope for borrowing is described in greater detail below. It is apparent that further clarification will be necessary, at least in some areas. This new scope for borrowing should focus on tackling the challenges mentioned above.

2.1 Defence

Defence expenditures exceeding the threshold of 1 % of GDP are permanently exempt from the borrowing limits imposed by the debt brake. This means that higher defence spending ratios, such as those considered necessary under NATO commitments, are no longer subject to national borrowing limits. The Basic Law states that this exemption also includes, in particular, aid to countries under attack, such as Ukraine, and expenditure on civil protection within Germany. The recommendation of the Bundestag’s Budget Committee defines defence expenditure as the spending allocated to the Ministry of Defence (section 14 of the central government budget).[1] When deciding which expenditures fall under the Ministry of Defence’s remit, central government legislators have significant leeway. They also have the option to define the expenditures subject to the borrowing limit more narrowly through an implementing act.

Defence spending has clearly already exceeded the 1 % threshold in the 2024 budget plan based on the definition applied to date. Given this, the further scope for borrowing would be used not only for additional defence spending, but also to create fiscal space for other expenditures included in the budget.[2] In addition to the expenditure of €53 billion in central government budget section 14, almost €8 billion was earmarked for Ukraine and €2 billion for civil protection and similar measures in 2024. The expenditures affected by the special rule therefore amounted to nearly €63 billion. Based on the nominal GDP for the 2024 budget, however, the 1 % threshold was much lower, at just over €41 billion. If the reformed debt brake had already been in place, this would have resulted in an additional borrowing scope of just over €21 billion for other purposes. This figure would have risen to around €30 billion if all NATO-related defence expenditures (excluding those already financed through the Armed Forces Fund) had been recorded under central government budget section 14.

In addition, in future higher defence spending within the core budget can be financed by borrowing. NATO appears to be preparing to demand significantly higher minimum defence spending from its member states in order to ensure the necessary military capabilities. There is talk of increasing NATO defence spending by 1.5 percentage points to 3.5 % of GDP. Thanks to the relaxation of its debt brake, Germany would be able to finance this additional expenditure through borrowing. The new rules also affect the additional expenditure that the core budget will have to cover from 2028 onwards when the borrowing authorisation of the Armed Forces Fund has been fully utilised. The new borrowing options therefore also close gaps that previously existed in financial planning.

2.2 Infrastructure and climate neutrality

A borrowing limit of €500 billion is available outside the debt brake for an infrastructure and climate neutrality special fund. The approval duration of this fund would be limited to 12 years. The plan is for €100 billion from this framework to be allocated to investments by the state and local governments, and another €100 billion to measures aimed at achieving climate neutrality.

The fund is intended for additional expenditures. However, the current safeguards to ensure this are inadequate. According to the explanatory memorandum to the constitutional amendment, additionality is deemed fulfilled if the “budgeted share of investments exceeds 10 percent of expenditures in the central government budget, excluding special funds and financial transactions.” However, this leaves room for interpretation.[3] There is no clear definition of additionality at all for state and local government projects or for climate neutrality efforts. The implementing act establishing the special fund should address this shortcoming and better ensure the strengthening of central government infrastructure, too.

Examples of gaps in the safeguarding of additionality can be found in the 2024 budget. The share of spending defined within the core budget was over one percentage point above the minimum 10 % threshold.[4] Based on this, €6 billion in expenditures could have been moved into the fund. Additional borrowing capacity in this amount would have been created in the core budget for other expenditures. In this case, the fund would not have been used solely to finance additional investments.

The coalition agreement implies that already planned investments and the announced electricity price subsidies will be funded using the new scope for borrowing. It appears that the infrastructure fund is meant to assist with closing the budget gaps in the rail sector as outlined in last summer’s 2025 plan.[5] The backlog of hospital renovation and modernisation investments will now be financed by borrowing. It was previously intended to cover this through state government budgets and higher health insurance contributions. The resources set aside in the Basic Law for the Climate Fund might be used to lower grid fees. This would mean that the state essentially assumes the costs of private investments already made. It lowers the cost of power consumption by financing it with loans.

2.3 State governments

In future, the state governments will be allowed to plan for loans amounting to 0.35 % of GDP annually (currently €15 billion) to finance structural deficits. The rule replaces the ban on structural net borrowing by the state governments established in the Basic Law. The state-specific bans will cease to apply once a central government law allocates the new borrowing limits to the individual states. The finance ministers appear to have come to an agreement about how to distribute the funds in May 2025.[6] According to press notices, they recommend that both state governments’ new debt and their share of €100 billion from the infrastructure fund be distributed in line with the “Königsteiner Schlüssel” financing key. This key comprises federal states’ population (one-third) and tax revenue following state government financial equalisation (two-thirds). This has not yet been transposed into law. In view of the new borrowing potential, it would be sensible to ensure the sustainability of states’ borrowing approaches. There would be some justification for basing the figures solely on tax revenue following state government financial equalisation.

3 Ensure targeted use of borrowing

It is recommended that the forthcoming implementing acts ensure that central, state and local governments apply the earmarked borrowing limits solely for their intended purposes. The following explores which rules in the implementing acts can help achieve this.

3.1 Defence

In order to ensure additionality, borrowing for defence should be limited to additional defence expenditure. First, steps should be taken to prevent central government from reallocating other expenses into the privileged category going forward. Here, it would make sense not to rely on the relatively loose definition in central government budget section 14 (Ministry of Defence spending),[7] but rather on an internationally agreed classification of defence expenditures. NATO spending seems less appropriate for this purpose, as there is a lack of detailed public data and the classification is not entirely consistent internationally. A suitable approach would be to use the EU-agreed classification of government functions (COFOG) as the basis.[8] This would probably also align with the planned defence-related exemption clause in the EU rules (for more information, see the supplementary information entitled “EU fiscal rules: proposed activation of national escape clauses”). Additionally, the expenditures explicitly mentioned in the Basic Law’s sectoral exception, such as for civil protection and data security, would also apply.

Second, the new borrowing scope should be used exclusively for defence spending in excess of the previous year’s level – not to cover other gaps in the budget. A practical approach would be to ensure additionality relative to the 2024 budget outturn. In other words, the expenditure ratio reached in the core budget last year is a plausible minimum threshold for spending not financed through borrowing. COFOG expenditures of the core budget, supplemented by the specifically mentioned areas (e.g. civil protection) could serve as a reference point here. These likely amounted to approximately 1 % of GDP.[9] This classification should therefore at least approximately ensure that no borrowing scope is created for other areas of the core budget. At the same time, any further increase in defence spending could, in principle, be financed through borrowing, as originally intended. This also applies to the continuation of expenditures currently financed through the Armed Forces Fund within the core budget.

3.2 Infrastructure and climate neutrality

The best approach would be to allocate the infrastructure fund’s resources to the most critical modernisation requirements. Policymakers argue that they need the loan funds urgently to address infrastructure problems. One can therefore expect that they will be able to clearly pinpoint the weaknesses and remedy them effectively. Bottlenecks seem evident in funding for rail and road infrastructure (particularly bridges), education facilities and the digitalisation of public services. In Germany, the chief responsibility for energy supply lies with private companies, meaning that investment needs for decarbonisation are primarily within the private sector. The state can provide targeted support here, for example by limiting additional decarbonisation-related costs during a transitional period. Policymakers are generally expected to carefully choose which tasks and projects will be financed from the fund and to justify them in terms of how they will help to address the challenges at hand. From this perspective, allocating credit funds to broadly reduce electricity prices via subsidies on network charges seems difficult to justify.

To achieve progress in infrastructure, it is important that fund resources are not diverted indirectly to other projects within the budget plans. It would thus make sense to define the minimum investment ratio in the central government’s core budget differently than seems to have been envisaged thus far (for the definition in the explanatory memorandum, see the section on infrastructure and climate neutrality). First, investment expenditures unrelated to German infrastructure should be excluded. This applies to investment grants to foreign countries (development aid) and to non-governmental enterprises (2024 plan: a total of €12 billion), as well as expenditures for called guarantees (2024 plan: €2½ billion). In addition, consideration should also be given to including capital injections to Deutsche Bahn, which ultimately fund the rail infrastructure (2024 plan: just over €5 billion). The current approach excludes them as financial transactions.[10] If the investment ratio is adjusted for the above items, it would have been close to, but below, the minimum level of 10 % in 2024. Thus defined, the minimum investment ratio would ensure the additionality of the fund’s central government projects relatively well.[11]

It would also make sense to calculate permissible investment borrowing amounts on the basis of the results reported in the annual financial statements. If additionality is based on target values not only for drafting the budget but also for final settlement, this opens up new structuring options for spending. In fact, investment spending has often significantly undershot budget estimates in the past.

The targeted use of resources should also be ensured for state and local governments, as well as for climate neutrality. To prevent states and local governments from simply shifting the financing of already planned measures to the infrastructure and climate neutrality special fund, a minimum investment ratio could also apply to them. A plausible approach would be to ultimately allocate them resources from the fund only to the extent by which their actual investment levels surpass a reference ratio from the recent past.[12]

4 Increase transparency regarding state finances, prevent budgetary problems effectively

The risk of budgetary problems increases in line with states’ scope for structural borrowing. This makes it all the more crucial to ensure that state finances are transparent and effectively monitored. The new borrowing scope should serve as an incentive for the states to align their debt brakes more closely, make their budget planning more transparent, and improve the data used for financial statistics.[13] Currently, the diversity of rules and the lack of transparency in planning and data make independent oversight of state finances difficult. Transparent state finances would also simplify the Stability Council’s budgetary supervision.

The individual states should use the new scope responsibly. For states that are already heavily indebted or even receiving budgetary assistance from the central government, it is in their own interests to first address their financial imbalances before utilising the new borrowing scope. A good signalling system is vital to reliably prevent financial problems. This could involve reviewing the Stability Council’s system of indicators, including at the municipal level if necessary (for example, with information on cash advances up to the current end) or lowering the alert thresholds.

5 Future task: Reverse the rise in deficits, complying consistently with EU rules

The reformed debt brake permits extensive deficits and thus a debt ratio that continues to drift further and further from 60 %. This would push interest expenditures up sharply – even if the central and state governments make use the new scope for the purposes set out in the Basic Law. Such a development would place a heavy burden on future budgets and restrict room for manoeuvre. Moreover, it would not be in line with EU rules in the longer term. The EU rules on deficits and debt ratios provide important anchors for sound public finances and a stability-oriented monetary union; the coalition agreement’s call for strict implementation is thus welcome. These are all arguments in favour of using the implementing acts and the planned further amendment of the debt brake to once again anchor sound public finances and EU rules in national law by setting concrete annual borrowing limits.

For Germany, the new EU requirements are likely to stipulate a target for the structural general government deficit of around 1 %, following an exemption period.[14] Germany (like other EU countries) has requested the activation of the national escape clause, which would permit deficits higher than those planned under normal rules (see the supplementary information entitled “EU fiscal rules: proposed activation of national escape clauses”). For the four to seven-year adjustment period, the new Federal Government must also agree on a fiscal plan with the EU committees that sets the baseline independently of the additional deficit options provided by the escape clause. This fiscal plan is likely to stipulate that Germany must aim for a structural general government deficit ratio of around 1 %. This target ratio is actually close to the average annual borrowing capacity of the new infrastructure fund. If the central and state governments make use of this fund, financing other expenditures through borrowing will be virtually out of the question – even for additional defence spending. This means that although a transition period is currently taking place, it will eventually only be possible to use a small portion of the new national scope for borrowing to align Germany’s plans with the EU requirements.

The implementing acts for the relaxed debt brake provide an opportunity to establish reliable guard rails for budget planning. The laws could specify the debt limits of the central government and the states, including their special funds, in line with the EU’s overall requirements.[15]^,[16]With regard to the conditionality on sufficient funding established in the coalition agreement, it would be necessary to take into account both national rules and the eventually significantly tighter deficit constraints in the EU rules. As the deficits must be reduced considerably again over time, it is advisable to reserve borrowing scope for current challenges in defence and infrastructure investments (including climate neutrality) and to counterfinance other additional measures.

Moreover, it would be advisable to readjust the constitutional provisions on credit limits to bring them into line with the EU benchmark for the debt ratio and put public finances back on a secure footing. The Bundesbank has presented proposals on reforming the debt brake with these aims. The current borrowing limits laid down in the Basic Law are meaningless if the EU requirements are regularly more ambitious. However, appropriate constitutional guard rails for the individual levels represent a key component of national rules. They also have the advantage that constitutional courts can check whether they are being adhered to, thus strengthening their binding effect from the outset. The coalition agreement envisages a further reform of the debt brake this year. Instead of making only selective adjustments – to stabilise investment, for instance – fundamental changes seem advisable for the period following the current transitional phase. The proposals put forward by the Bundesbank offer suitable starting points for this: they aim to prioritise government investment (in infrastructure and defence) whilst also safeguarding sound public finances and the EU rules.[17]

The Armed Forces Fund established in 2022 will continue to run until its credit authorisation of €100 billion has been fully utilised. At the end of 2024, €77 billion of authorisations were still available for payments. According to the Ministry of Defence, the majority of this has already been allocated to procurement contracts.
As the detailed results for 2024 are not yet available, the scope for additional borrowing shown here is based on the budget plan.
See the reference in the explanatory memorandum Deutscher Bundestag (2025), p. 23. However, the wording does not clearly define the ratio and, for example, does not provide a transparent explanation of how it was derived from previous ratios. This issue should be addressed.
The numerator of the ratio included planned investment spending of €52 billion. This excludes loan disbursements and equity investments. In any case, these types of financial transactions are not covered by the debt brake. The expenditure amounts included in the denominator totalled €459 billion (also excluding financial transactions).
See CDU,CSU,SPD (2025), p. 26.
See Deutsche Presse-Agentur (2025).
Central government budget section 14 already covers institutions such as the universities of the Federal Armed Forces, whose spending is primarily focused on education rather than defence.
Unlike central government budget section 14, this classification excludes items such as pensions for former military staff and the universities of the Federal Armed Forces.
Based on preliminary data, defence spending defined by COFOG totalled 1.1 % of GDP in 2024. The COFOG figure for the core budget is lower because the figure mentioned includes debt-financed expenditure from the Armed Forces Fund. However, the other excluded expenditures (civil protection, higher transfers to Ukraine, etc.) still have to be included in the 2024 reference value for the new sectoral exemption. Since these were roughly equivalent to the expenditures of the Armed Forces Fund, the reductions and additions largely offset one another.
Investments in rail infrastructure are made through InfraGO AG, which is part of the government sector. Investments financed by this entity from capital injections are counted toward the Maastricht deficit limit in the same way as investments made by this entity from central government grants.
For a broadly similar approach, see Deutsche Bundesbank (2025b).
See Deutsche Bundesbank (2025b).
A sensible approach would be to limit aggregated items (such as additional revenue and reduced expenditure) and standardise the classification scheme for financial transactions in accordance with the national accounts guidelines. In addition, the published budget projections should be revised to reflect the latest tax estimates, any interim changes to tax law and recent salary adjustments. See also starting points for greater transparency: Deutsche Bundesbank (2024a), Chapter 5 “Outlook for 2024 and selected fiscal policy considerations”.
This baseline footing will then ensure that the debt ratio gradually declines toward 60 % over time. The significant demographic-driven increases in expenditures mean that Germany must initially aim for a comparatively low structural deficit ratio. For more detailed information on possible EU requirements for Germany, see Deutsche Bundesbank (2025b).
The EU fiscal limits are defined as expenditure growth rates derived from the deficit targets. However, as with the debt brake, structural limits on net borrowing by the central government and the states seem more appropriate as national anchors.
National and EU fiscal rules pursue different objectives in some respects, partly because EU rules take less account of federal structures and budgetary law aspects. In this regard, the rules are not identical. This makes it important for the Stability Council to regularly monitor whether German public finances are in line with EU requirements and propose appropriate corrective measures, if necessary. The Independent Advisory Board supports the Stability Council in monitoring compliance with EU rules. The regulations governing national monitoring of EU requirements still need to be adapted to the reformed EU rules.
See Deutsche Bundesbank (2025b).

2.3 State government finances[14]

2.3.1 2024 result and outlook

State governments, including their off-budget entities, recorded a deficit of €18 billion in 2024, after posting an almost balanced budget a year earlier. This deterioration was driven in part by one-off effects and negative cyclical influences. Weak economic activity put a brake on tax revenue. At the same time, expenditure rose steeply. Personnel expenditure reflected, not least, wage adjustments. In terms of investment spending, there were also major one-off effects stemming from financial transactions, such as acquisitions of equity. After adjustment for these financial transactions, the deficit amounted to €8 billion. In addition, after adjustment for the cyclical component from the Federal Government’s spring estimate for 2025, the overall fiscal balance is close to the zero mark.

The state government core budgets closed the first quarter of 2025 with a surplus of €2 billion. This improvement on the deficit of €3 billion recorded a year earlier is overstated as a result of one-off intra-year expenditure developments. Revenue rose steeply on the same quarter of the previous year (+5 %), thanks, in particular, to considerably higher tax revenue (+6 %). By contrast, expenditure increased by only 1 %. Staff expenditure increased only slightly (also by 1 %). However, the prior-year level was elevated by one-off payments. A one-off effect in North Rhine-Westphalia had a dampening effect on expenditure: in the previous year, the state had already paid out annual lump sums for universities in the first quarter. In the second quarter, this will have a negative impact on the year-on-year figure.

State government fiscal balance

As in 2024, state government is likely to record a deficit for 2025 as a whole. Revenue is likely to rise only moderately owing to the ongoing weakness of economic activity. The official tax estimate expects federal states’ tax revenue to grow by 3.2 % and thus at a significantly slower pace than at the start of the year. Staff costs – a major expenditure item – and other operating expenditure will both rise markedly, albeit less sharply than in previous years. The after-effects of high inflation rates on these expenditure items should now have come to an end. The fact that the burdens arising from financial transactions will probably be significantly lower than in the previous year should have an alleviating effect.

The expected deficit does not indicate a general need for consolidation. However, the situation probably differs significantly from one federal state to the next. In principle, the reformed debt brake confers federal states with a total structural borrowing scope of 0.35 % of GDP. What this means for the structural fiscal space of the individual federal states remains unclear: until now, the federal states have been calculating the borrowing limits of their debt brakes very differently.[15] In addition, many federal states have repayment obligations stemming from emergency borrowing. Furthermore, federal legislators have not yet determined how the new structural fiscal space will be distributed across the individual federal states (see the supplementary information entitled “Stability-oriented adaptation of relaxed debt brake”). Aside from this, the financial situation of the individual federal states varies widely. As a result, the new borrowing scope is likely to open up additional fiscal space in some states, whilst others will still need to consolidate their budgets.

The new Federal Government intends to examine whether tasks are appropriately distributed among the different federal levels and where potential for digitalisation might be unlocked.[16] This is welcome. A task and its financing should both be located at the same government level. This allows a better use of resources, making it easier for the electorate to identify where responsibilities lie. Digitalisation also offers opportunities to harmonise and simplify administrative processes throughout Germany. This could, not least, save scarce personnel resources.

2.3.2 Recourse to the emergency clause

The Schleswig-Holstein State Constitutional Court declared parts of the state’s 2024 budget to be invalid because the state parliament had not fulfilled its disclosure requirements.[17] According to the ruling, the state had, in particular, failed to provide sufficient justification for its emergency borrowing. The ruling will not have an impact on the state government budget for 2024, as the books are already closed. However, the state government budget for 2025 also envisages emergency borrowing (just under €½ billion). The state parliament should now examine whether the 2025 budget complies with the relevant requirements of its constitutional court and, if not, make the necessary adjustments.

The ruling sets a relatively high bar for emergency borrowing. From an economic perspective, it is right for a strict debt rule to also include an escape clause for emergencies. At the same time, high requirements for triggering the escape clause are crucial in order to ensure that the clause does not undermine the intention of the debt rule. It thus seems reasonable that the other states should apply strict standards, too. In addition to Schleswig-Holstein, Saarland and Saxony-Anhalt are currently planning to incur emergency borrowing this year.

3 Social security funds

3.1 Pension insurance scheme

3.1.1 Outlook for 2025

The statutory pension insurance scheme recorded a deficit of nearly €3 billion in the first quarter of 2025. The deficit was thus around double the size it had been a year earlier. Revenue saw a sharp rise of 5½ % due to strong growth in earnings subject to compulsory contributions. These rose more strongly than earnings overall, as earnings subject to compulsory social contributions probably replaced tax-exempt inflation compensation bonuses. At 6½ %, however, growth in expenditure was even stronger than that in revenue. In addition to the pension adjustment of 4½ % in mid-2024, this was influenced by three contributory factors: (i) an increase in the number of pensions, (ii) additional expenditure on the new supplements to pensions for reduced earning capacity, and (iii) higher supplementary contributions to the statutory health insurance scheme.[18]

Finances of the German statutory pension insurance scheme

In 2025 as a whole, the deficit is likely to grow considerably. Expenditure is likely to rise somewhat less vigorously over the remainder of the year. This is because the mid-year rise in pensions will be somewhat weaker than in 2024 (just over 3½ %). In addition, the new supplements to pensions for reduced earning capacity will only heighten year-on-year expenditure growth until mid-year. Nonetheless, revenue growth will probably decline somewhat more sharply over the remainder of the year, as the supporting effects relating to the discontinuation of inflation compensation bonuses are coming to an end.

3.1.2 Pension policy plans of the new Federal Government

In essence, the coalition agreement envisages a continuation of the existing pension policy. Consequently, the demographic pressures on the pension insurance scheme fundamentally remain high. Moreover, the coalition agreement does not provide any major impetus for increasing the labour force participation rate amongst older people. In addition, the planned measures will significantly heighten the pressure on pension expenditure: first, the extension of the threshold for the replacement rate and, second, the expansion of recognised child-raising periods for insured persons with children born before 1992 (“mothers’ pensions”). However, the additional expenditure on these two items is to be offset by transfers from the central government budget. Over the course of the legislative period, the Federal Government intends to discuss further reform steps for the period after 2031. Prior to this, a reform commission will draw up proposals on such steps.

The Federal Government is planning to extend the 48 % replacement rate until 2031. This will entail a significantly stronger rise in pension expenditure than already expected. This is because, under current legislation, the sustainability factor can curb pension adjustments again from next year. For this reason, current forecasts point to a fall in the replacement rate, which could be down to around 46½ % in 2031.[19]

No major changes to the retirement age or retirement entry are planned. However, in view of rising life expectancy, it would make sense to link the retirement age to life expectancy in the period after 2031.[20]It would also be sensible to revoke the special rule that enables employees with an exceptionally long employment history to retire earlier while still drawing a deduction-free pension. This would give positive impetus to labour force participation and better adapt the pension insurance scheme to demographic shifts.

The planned financial incentives for extending employment beyond the statutory retirement age are likely to have only a limited effect. [21] The Federal Government intends to bring in financial incentives for employees to entice them to continue working beyond the statutory retirement age (“active pension”). It plans to exempt wages and salaries up to €2,000 per month from taxation once employees have reached the standard retirement age. However, the previous Federal Government concluded in its 2024 Pension Report that financial reasons are only a minor factor when people are deciding whether to work in their later years.[22]In addition, special tax incentives hold further disadvantages: they make taxation more complex overall, reduce the tax base and incentivise creative tax accounting. There are therefore good reasons not to subsidise employment beyond retirement age to the detriment of other forms of work.

3.2 Federal Employment Agency

The Federal Employment Agency posted a deficit of €2 billion in the first quarter of 2025. This was a deterioration of just over €1 billion compared with the same quarter of 2024. The Federal Employment Agency’s revenue saw strong growth of 8 %, partly thanks to the higher contribution rate for insolvency benefit payments (0.15 %, compared with 0.06 % a year earlier). However, expenditure rose much more sharply (+18½ %), including outlays on the particularly large item unemployment benefits. This was mainly due to the significantly higher number of recipients.

Finances of the Federal Employment Agency

The Federal Employment Agency is likely to record a noticeable deficit for the year as a whole. This will probably be somewhat higher than planned (plan: €1½ billion). However, this should not necessitate a rise in the contribution rate. Labour market developments, which are less favourable than was expected when the budget was drawn up, will have a negative impact overall. The deficit could exceed the available reserves (end-2024: €3 billion). In that case, central government could prevent the contribution rate from rising by providing multi-year liquidity assistance. Once economic developments improve, the Federal Employment Agency will probably be able to repay this assistance from its surpluses.

(This article reflects data up to 21 May 2025, 11:00.)

List of references

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Deutsche Bundesbank (2025a), Commentaries: Economic conditions and Public finances, Monthly Report, April 2025.

Deutsche Bundesbank (2025b), Sound public finances, stronger investment: a proposal to reform the debt brake, Monthly Report, March 2025.

Deutsche Bundesbank (2024a), State government finances in 2023: situation worsens, but structural balance still in surplus, Monthly Report, October 2024.

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

Deutsche Bundesbank (2023a), Public finances, Monthly Report, May 2023, pp. 57‑75.

Deutsche Bundesbank (2023b), The growing significance of central government’s off-budget entities, Monthly Report, June 2023, pp. 63‑82.

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Lalive, R., A. Magesan and S. Staubli (2023), How Social Security Reform Affects Retirement and Pension Claiming, American Economic Journal: Economic Policy Vol. 15(3), pp. 115‑150, August 2023.

Manoli, D. and A., Weber (2016), Nonparametric Evidence on the Effects of Financial Incentives on Retirement Decisions, American Economic Journal: Economic Policy Vol. 8(4), pp. 160‑182, November 2016.

OECD (2010), Choosing a Broad Base – Low Rate Approach to Taxation, OECD Tax Policy Studies, No 19, OECD Publishing.

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Schleswig-Holstein State Constitutional Court (2025), Urteil vom 14. Februar 2025 – LVerfG 1/24 – Verfassungsmäßigkeit von Notkrediten im Landeshaushalt 2024, February 2025.

Seibold, A. (2021), Reference Points for Retirement Behavior: Evidence from German Pension Discontinuities, American Economic Review Vol. 111(4): pp. 1126‑1165, April 2021.

Social Advisory Council (2024), Jahresgutachten 2024, Gutachten des Sozialbeirats, November 2024.

Thomas, A. (2020), Reassessing the regressivity of the VAT,OECD Taxation Working Papers, No 49, OECD Publishing.

This section relates to data from the national accounts and Maastricht debt. This is followed by reporting on budgetary developments (government finance statistics) in the areas for which data are available for the first quarter of 2025.
See CDU,CSU,SPD (2025).
In principle, the social security funds are not allowed to become indebted. However, the statutory pension insurance scheme can still finance deficits with its available reserves. In 2027, these reserves will likely be insufficient, meaning that the statutory pension insurance contribution rate will have to rise. Only a cyclical financing gap is expected for the Federal Employment Agency. Central government is likely to bridge this gap by means of a loan. For information on the statutory pension insurance scheme and the Federal Employment Agency, see the section on social security funds.
See Deutsche Bundesbank (2025a), Chapter 2: “Public finances”.
For an assessment of the measures in the coalition agreement from a cyclical and supply-side perspective, see “The economy is expected to more or less stagnate in the second quarter” in the chapter The German economy.
Targeted transfers can be used to prevent low-income households from experiencing financial strain.
This baseline footing for the structural deficit will then ensure that the debt ratio continues to fall in the direction of 60 %. The significant increase in demographic spending means that Germany will initially have to aim for a relatively low structural deficit ratio. For more details on possible EU requirements for Germany, see Deutsche Bundesbank (2025b).
See Deutsche Bundesbank (2025b).
See also Federal Ministry of Finance (2024), pp. 29 ff.
See, for example, OECD (2010) and Thomas (2020).
See also Federal Court of Auditors (2024).
Only the off-budget entities for which central government publishes monthly cash data are included. Not least, this means that the bad bank FMSW, the German Nuclear Waste Disposal Financing Fund (KENFO Foundation), central government-owned local public transport companies (particularly regional trains, which fall under the remit of Deutsche Bahn) and the infrastructure division of Deutsche Bahn are omitted. For information on the off-budget entities included in the reporting group, see Deutsche Bundesbank (2023b), pp. 78 ff.
Moreover, there is no longer any legal risk concerning the solidarity surcharge. The Federal Constitutional Court ruled that the special financing needs arising from German unification have not yet clearly reached an end. See Federal Constitutional Court (2025).
Data for state government off-budget entities become available with a longer time lag. Consequently, this section also reports on the annual accounts for 2024. The figures for the first quarter of 2025 are based on the monthly cash statistics for the core budgets.
The federal states apply different adjustment methods to their debt brakes than that used for the above-mentioned structural budgetary equalisation of state government as a whole in 2024.
See CDU,CSU,SPD (2025), pp. 55 and p. 59.
See Schleswig-Holstein State Constitutional Court (2025).
The pension insurance scheme pays half of pension recipients’ contributions to the statutory health insurance scheme. The sharp increase of just over 1 percentage point in average supplementary contributions in 2025 is weighing noticeably on the pension insurance scheme’s finances. The impact of this in the first quarter remains limited, as the increase in supplementary contributions for pension recipients only applies from March onwards. A year earlier, the rise in supplementary contribution rates, whose effects were still unfolding, was significantly lower.
See Social Advisory Council (2024). From 2026 onwards, the replacement rate will additionally be reduced by higher contribution rates to the long-term care insurance scheme. This is because, without a threshold for the replacement rate, increases would have to be borne entirely by pension recipients.
The Bundesbank has already presented comprehensive simulations on this subject in previous reports. See Deutsche Bundesbank (2019, 2023c, pp. 79 ff.)
See also Deutsche Bundesbank (2024b), Chapter 3.1.2 “Reform options to strengthen the potential labour force”.
See Federal Ministry of Labour and Social Affairs (2024). Seibold (2021), for example, finds that pure financial incentives have only weak effects. The same is true of other countries (see, inter alia, Manoli and Weber (2016), Duggan et al. (2023) and Lalive et al. (2023)).
Data for state government off-budget entities become available with a longer time lag. Consequently, this section also reports on the annual accounts for 2024. The figures for the first quarter of 2025 are based on the monthly cash statistics for the core budgets.

Monthly Report – May 2025 Vol. 77 No 5