Government's budget falls short billions, despite record tax income
In a surprising turn of events, Germany is projected to face a substantial budget deficit of up to €172 billion for the 2027–2029 period, primarily due to defense spending increases, settlement of tax arrears, and tax burden reductions for businesses.
To bridge this gap, the German government is focusing on increased borrowing, with an estimated €850 billion by 2029, to finance infrastructure modernization, the Bundeswehr's expansion, and economic support. The government is also partially easing the "debt brake" fiscal rule to allow more defense spending, although there is no clear public indication yet of direct tax increases being planned.
The 2026 budget, which serves as a basis for the 2027–2029 period, is currently in government coordination and is expected to be approved soon. The fiscal policy involves rising defense budgets, reaching 3.5% of GDP by 2029, and infrastructure investments to boost growth. This seems to balance fiscal needs more by spending reallocation and borrowing than by tax hikes.
The traditional debt brake limits borrowing, but its partial easing mainly benefits defense and does not imply broad tax increases. The government has also reduced the tax burden for businesses, suggesting that tax hikes are not a central tool in the deficit strategy.
It's important to note that income tax is split between the federal government (42.5%), the states (42.5%), and the municipalities (15%). The majority of tax revenue comes from indirect taxes, making up 75.4% of the total. In 2024, the government collected 719 billion euros from indirect taxes, an increase of 32 billion euros compared to the previous year.
Value-added tax is distributed with approximately 52% going to the state, 46% to the states, and only about 2% to the municipalities. Municipalities primarily benefit from property and business taxes.
The German government is facing criticism for instances of tax waste, such as 500,000 euros for the unsuccessful straightening of a road in Saxony-Anhalt and 4 million euros for a non-operational solar glider in Schleswig-Holstein.
As the government grapples with the budget deficit, discussions are ongoing about cost savings and potential tax increases, such as wealth tax and inheritance tax for high estates. However, any plans for tax increases have not been prominently announced in the current budget coordination phase.
Despite the record high total tax revenue of 947.7 billion euros in 2024, collected by federal, state, and local governments, the German government is still facing a significant budget deficit. Social security contributions, income tax, and solidarity surcharge are increasing for German residents.
As the situation unfolds, it remains to be seen how Germany will address this budget deficit and whether tax increases will play a role in the solution.
- The government's strategy to address the projected budget deficit of up to €172 billion from 2027 to 2029 does not seem to heavily rely on direct tax increases, as their focus is on increased borrowing, reallocation of spending, and infrastructure investments.
- In the face of the ongoing discussions about cost savings and potential tax increases, such as wealth tax and inheritance tax for high estates, the government has not yet prominently announced any plans for tax hikes in the current budget coordination phase.
