Germany’s Budget May Boost Its Economy More Than Expected

Germany’s budget for 2025 and spending plans for subsequent years, including defense outlays, are higher than expected, taking advantage of the relaxation of fiscal limits by parliament earlier this year. That means the country will run bigger deficits, resulting in faster near-term growth, according to Goldman Sachs Research.

The German cabinet in late June passed the second draft of its 2025 budget and published its medium-term fiscal plan running through 2029. “Both make use of the substantially expanded fiscal space available to the federal government under the reformed German fiscal rules,” economist Niklas Garnadt and his colleagues write in a report.

The result is that the federal deficit, based on the main budget and the off-budget infrastructure and military funding, is planned to be 3.3% of GDP this year and 3.6% to 3.8% of GDP in subsequent years. Such deficits are stimulative, and they are “substantially more than we expected,” particularly this year and next, Garnadt writes.

Our researchers were especially surprised by higher deficits in the main budget and the country’s infrastructure fund. The main budget has lower revenue than initially planned and higher defense and current spending, while investment spending is lower. The infrastructure fund includes significant transfers to the states and €19 billion ($22 billion) in federal public investment, more than half of which goes for railways.

What is the outlook for Germany’s economy?

Our economists now see Germany’s economy growing 0.4% in 2025, an increase of 0.1 percentage point from their prior forecast. They expect 1.4% growth in 2026, a 0.2 percentage point increase to the outlook.

They also slightly lowered their forecast for GDP growth in 2027, from 2.0% to 1.8%, because recent developments suggest government spending will be more tilted toward current expenses rather than investment. The spending will be more frontloaded, and there will be “a lower cumulative multiplier,” Garnadt writes.

There are several reasons why the budget and the medium-term fiscal plan will be less oriented toward investment and more toward current spending. First is that actual investment spending in recent years has been substantially below budgeted investment spending. The government has found it difficult to deliver fully on its investment promises in the past, and it only delivered about €75 billion under a €100 billion investment budget last year. 

The second reason has to do with federal fund transfers to state governments. “While the transfer to the states is labelled as investment spending in the federal budget, the recent agreement between the states and the government does not require these funds to be used for specific projects or for additional investment,” Garnadt explains. This means the money can replace state-level funds that were budgeted as investment spending, and those funds can be repurposed for current spending.

Higher investment spending in an alternative scenario

In another possible scenario, investment spending might indeed be higher. In this outcome, the fiscal plan is implemented as planned and transfers to the states do, in fact, lead to additional state-level investment, the report notes. This would boost public investment to 0.3% above the GDP baseline the researchers are using for their forecasts.

“This scenario would lead to a steeper increase in the deficit and a more frontloaded fiscal impulse, that on aggregate would also be larger due to the higher share of public investment,” Garnadt writes.

Even without that, the budget draft and fiscal plan “reinforces our expectation for a large fiscal boost,” our researchers find. And this furthers the expectation that an economy that has lagged the rest of Europe for several years is on a faster growth path. Goldman Sachs Research’s growth forecasts for the country are now further above consensus expectations for 2025 and 2026 and meaningfully above the current Bundesbank forecasts. 

 

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