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. 

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). 

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

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.

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.

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. 

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. 

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. 

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

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.

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.

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.

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.

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

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. 

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. 

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. 

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.)

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