Budget has yet to be endorsed by the Commission.
German Government Faces Challenges in 2026 Budget Amidst Projected Deficit
The German government is gearing up for a significant budgetary challenge in 2026, with a projected €30 billion deficit looming due to increased government spending and rising interest payments on debt. This deficit will require tough decisions, including potential spending cuts and austerity measures, as the government adheres to Germany's constitutional “debt brake” that limits borrowing.
One of the key challenges is the rise in interest payments on the national debt, which consumes a larger portion of the budget due to higher interest rates. Additionally, new coalition commitments like the “mothers’ pension” and increased pension payments exert extra financial pressure. Increased tax breaks for businesses also reduce government revenue, thereby widening the deficit.
The government’s plan to exempt defense and infrastructure spending from the debt brake partially mitigates the borrowing constraint, but requires cuts in other areas. Defense spending in 2026 is planned at around €128 billion, with a loosened debt brake for defense spending.
In an effort to balance commitments to social and infrastructure spending with fiscal discipline, Finance Minister Lars Klingbeil has presented the draft for the 2026 federal budget, which includes investments of €126.7 billion. Funds are allocated for the renovation of bridges and railway lines, stronger digitization, and more money for education.
However, the draft also reflects cuts, such as in development aid. The labor and social budget is the largest, with €197.4 billion, a 4% increase compared to the planned 2025 budget. The value added tax on restaurant meals is reduced from 19% to 7%.
The savings rate is set at 2% in 2026. The draft also includes measures announced in the coalition agreement, such as more funding for social housing construction and daycare centers, the continuation of the Germany ticket in local transport, and an increase in the commuter allowance to 38 cents from the first kilometer.
Despite these measures, the Ministry of Health has made it clear that the loans are not sufficient to prevent contribution increases in 2026. Health insurers have criticized that no additional budget funds are provided.
In a warning about the challenges ahead, Finance Minister Klingbeil has stated that if good work is not done in the reform commissions, "those with the chainsaw" will come eventually. The economic environment is also challenging, with recent GDP contraction limiting growth-related revenue increases that could offset spending.
Overall, the government must balance commitments to social and infrastructure spending with fiscal discipline, while implementing austerity measures and spending reforms, under strict borrowing limits, to manage the 2026 budget gap.
Personal-finance challenges loom for the German government as they strive to maintain fiscal discipline while addressing projected deficits. Budgeting for 2026 will require careful consideration, especially with cuts to areas like development aid and reduced savings rate, to accommodate increased spending on social housing, daycare centers, and infrastructure projects.
