Germany headed for biggest deficit since reunification, Bundesbank says

Germany is heading for its largest deficit since the reunification between the east and west three decades ago due to the government’s spending plans, the Bundesbank said on Friday, calling for urgent action to keep public finances in check.

Germany is planning to plough hundreds of billions of euros into infrastructure and defence in the coming years, moving away from its long-held focus on fiscal discipline in a bid to revive an economy that has lost competitiveness.

The central Bundesbank estimates these investments, combined with tax cuts and transfers, will push the government’s deficit to 4.8% of economic output in 2028, the highest level since 1995 after the reunification with East Germany.

The German central bank, which advises the government on economic policy, said this would violate fiscal rules enshrined in the constitution and urged the government to take action.

“It is currently unclear how central government intends to deal with the urgent need for action to ensure compliance with national fiscal rules by 2028,” the Bundesbank said in its monthly report.

Even with the higher deficits, Germany’s debt-to-GDP ratio will remain relatively low at 68% in 2028 from 63% this year. Italy and France are both well into triple digits.

DEBT BRAKE

Germany’s debt brake limits borrowing to 0.35% of gross domestic product.

The German government, a coalition between the centre-right Christian Democrats and centre-left Social Democrats, has secured an exemption for defence spending and for a special 500-billion euro ($585.60 billion) infrastructure fund.

But the Bundesbank estimates much of the 2028 deficit will come from social spending and other types of investment.

“There will be revenue shortfalls due to various tax cuts and additional expenditure as a result of transfers,” the Bundesbank said.

On the upside, the cumulative overall effect of infrastructure and defence spending will add around  1.3 percentage points to GDP between 2025 and 2028, the Bundesbank said.

It estimates that every euro invested in those sectors will add roughly 70 cents to economic output.