As we approach the summer of 2025, the coalition government in Germany is facing a tough challenge in agreeing on the budget for the upcoming year. With the need to find savings of EUR 15bn-EUR 30bn, equivalent to 3.2% to 6.3% of the 2024 budget, tough decisions will have to be made. This will likely result in spending cuts across most ministries, potentially impacting net investment and the government’s ability to tackle long-term challenges facing the country.
Despite these challenges, Germany’s fiscal position sets it apart from other major European economies like the United Kingdom, France, and Italy. While these countries are dealing with high deficits and rising public debt, Germany has maintained a stronger fiscal stance. In the years leading up to the Covid-19 pandemic, Germany consistently ran government primary surpluses, providing significant fiscal space for growth-enhancing investments.
Looking ahead, Germany is expected to run deficits in the coming years as spending pressures increase, but the country’s debt-to-GDP ratio is projected to decline. This favorable fiscal outlook provides room for the government to address key challenges such as geopolitical risks, transition risks for energy-intensive industries, and the impact of an ageing population on spending pressures.
To maintain its sovereign rating and economic stability, Germany must focus on higher net investments and raising its growth potential. These measures will be crucial in navigating the uncertainties of the global economic landscape and securing a strong fiscal position for the future.
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Written by Eiko Sievert, Director in Sovereign and Public Sector ratings at Scope Ratings GmbH, and a member of the Macroeconomic Council.
