Germany government’s fiscal plans show ambition, but can it deliver?

The German finance ministry’s draft budget for 2025 and updated medium-term fiscal plan show the government is embarking on a major spending spree to quickly reach NATO’s new spending target, modernise the country’s creaking infrastructure, and end the economy’s slumber. This broadly supports the large upward revisions to Germany’s growth outlook that we made in April.

What you will learn in this report:

• There’s some upside risk to our call. The planned additional federal deficits until 2029 exceed last year’s plans by nearly €600bn, close to €100bn more than our baseline implies. By 2029, the federal deficit could amount to about 3.7% of GDP, and likely just above 4% including other levels of government. This is a significant gap compared with our 3.6% of GDP deficit forecast.
• However, we’re unconvinced that the plans will materialise in full. The budget is even more tilted towards investment than we thought, but defence and construction firms will struggle to absorb all the funding. We therefore don’t plan major changes to our medium-term growth forecasts.
• Part of the additional deficit is a result of tax cuts, whose impact on capex is already reflected in our GDP forecast. Moreover, the deficit plans may clash with EU rules, and the planned quick ramp-up in defence spending is likely, in part, merely a signal of willingness to comply with US demands ahead of the NATO summit.