German parties consider taking on more debt

A lack of money has already caused plenty of failures, including the previous government coalition made up of the Social Democrats (SDP), the German Green party and the liberal FDP. When the 2025 budget was drawn up, there was a shortfall of €25 billion ($26 billion). The SPD and the Greens wanted to fill the hole by taking out loans, while the FDP outright rejected any new debt and preferred to cut social spending. The coalition collapsed in November 2024, as the three parties were unable to reach an agreement.

That's left Germany without a budget for 2025. Adopting one will be one of the first tasks of the new government. It will not be easy as the parties that, according to the polls, are currently likely to form the next coalition do not share the same ideas regarding public finances.

What is Germany's debt brake?

Article 115 of the Basic Law, Germany's constitution, states that "revenues and expenditure shall in principle be balanced without revenues from borrowing" — roughly speaking, that the state may only spend as much money as it collects. The so-called debt brake only allows loans of up to 0.35% of the gross domestic product. Exceptions can only be made in emergency situations, if, for example, there is a natural disaster or serious economic crisis

However, tax revenues no longer cover the impending expenses. Billions are being devoured by increased military expenditures, support for Ukraine, the renovation of Germany's broken infrastructure, the country's energy transition towards climate neutrality and the improving the sluggish digitalization process.

The center-right bloc of Christian Democratic Union and its Bavarian sister party Christian Social Union (CDU/CSU) and the FDP want to maintain the debt brake.

"How far do we actually want to go with our debt?" asked CDU/CSU chancellor candidate Friedrich Merz in a TV debate with German Chancellor Olaf Scholz at the beginning of February. "I am of the opinion that we also have an obligation to our children, who will have to pay it back at some point."

In 2024, the German government collected around €440 billion in taxes. The total revenues of the government, the federal states and the municipalities amounted to around €960 billion. "Basically, at some point we should be able to make ends meet with the money we collect in taxes in Germany," said Merz.

Scholz argues for more debt

The SPD and Greens, who would be considered for a coalition with the CDU/CSU, would like to amend Article 115.

"We want to modernize the debt brake cautiously," said Scholz in the last session of the Bundestag, the German parliament, ahead of the elections on February 23.

Scholz has argued for months that Germany can afford higher levels of debt. "The US has a national debt of over 120% of GDP, while Germany is falling towards 60%." He added that other strong economies such as Italy, France, the UK, Canada and Japan also had national debts of over 100%.

Merz disagrees. "We will have to set new priorities in the budget, which means that we can no longer wish for everything," he said, adding that subsidies would have to be reduced and bureaucracy downsized. He added that social expenditure should be reviewed and that more people should work instead of receiving benefits from the state. "These are potential savings that we need to exploit."

German economy unlikely to grow much in near future

The CDU/CSU is also hoping that there will be increased tax revenues through economic growth. But Scholz finds this "ridiculous" in view of the current economic situation. In its annual economic report, the German government has predicted growth of just 0.3% for 2025 and 1.1% in 2026. Robert Habeck, the economy minister and leading chancellor candidate for the Greens, forecast in the Bundestag in January that the situation was not likely to change in the near future.

The Greens also see no alternative to taking on additional debt.

"I'm not talking about abolishing the debt brake, I'm not talking about unlimited debt," Habeck also said, pointing out that even leading economists,

Germany's central bank and international institutions, such as the OECD and the IMF, believed that more flexibility was needed in the financing of the public purse.

"We cannot shape the future with the strict rule of a debt brake that dates back to the noughties, from a different time, when globalization was growing, when we didn't have to worry, when there was no war in Europe," said Habeck.

Increased military spending for Germany and NATO

Military expenditure is an ever-increasing cost factor. After the fall of the Berlin Wall and German reunification, the Bundeswehr, the German military at the time, was downsized and received gradual cuts to funding. When NATO members agreed in 2014 to spend 2% of GDP on defense each year, Germany was a long way from achieving this goal.

After Russia's full-scale invasion of Ukraine in February 2022, the Bundestag approved a loan-financed special fund of €100 billion to rearm and reequip the military. The money, which would complement the annual defense budget, was to be spent over several years. In 2024, the defense budget amounted to €52 billion and was topped up by €20 billion from the special fund.

The €100 billion will probably have been spent by 2027. At the same time, the 2% target from NATO is expected to rise. According to recent calculations, 3.6% of GDP would be needed to cover the military alliance's target capability.

According to Germany's Federal Statistical Office, GDP amounted to €4.3 trillion last year. Spending 2% would be €86 billion and 3.6% would be €150 billion. By comparison, the entire federal budget for 2024 amounted to €474 billion.

Scholz has said that if 2% of GDP has to be spent on defense, an additional €30 billion will have to be raised from 2028 onwards. He said it cannot just be found "on the side."

Social spending or investment or tax cuts?

During the election campaign, Scholz has warned against cutting pensions. He has said that he is against playing off security against other needs, so that "we don't have to make cuts in social services, neglect the railroads, not expand the roads, or let our infrastructure rot."

"That's a pattern we know from the Social Democrats," says Merz in response. "If there's a lack of money, we run up more debt, and if we can't manage with more debt, we raise the taxes."

But does the CDU/CSU really want to maintain the debt brake no matter what? During the election campaign, Merz has also signaled otherwise.

"I did say that we can discuss everything," he said in his TV debate with Scholz. He then added insistently, "But first comes the potential for savings, then growth and then there really will be adjustments to the budget, which are urgently needed.”

Not least because the CDU/CSU have promised far-reaching tax cuts in their election manifesto. Economic research institutes have already calculated that the total of these would result in an additional budget deficit of €80 to €110 billion.

According to the polls, Germans seem to have changed their opinion on this matter recently. For years, potential changes to the debt brake were very unpopular. But a Forsa survey commissioned by the German Council on Foreign Relations, found that 55% of Germans were currently in favor of reforming the debt brake or even abolishing it altogether. Only 42% want to keep it unchanged.

This article was translated from German.