Berlin. From the point of view of the “economic wise men”, the German economy is regaining its footing - but in the long term there could be huge financial gaps in the federal budget. The Economic Advisory Council warned the federal government against excessive debt policy. The economists see a task of “historic proportions”. Politicians will not be able to avoid making tough decisions, says chairwoman Monika Schnitzer in Berlin. The currently comparatively robust economy is doing little to change this.
The council expects gross domestic product to rise significantly this year for the first time since 2022, by 1.3 percent. Growth of 1.0 percent is expected next year.
The German economy has recovered more quickly than expected from the “energy price shock” triggered by the Iran war, according to the annual report. Exports in particular are developing better than expected. In addition, increasing state spending worth billions is supporting growth. The background is debt-financed “special funds” for modernizing the infrastructure, measures for more climate protection and increasing defense spending, which are essentially financed on credit.
Many research institutes and the federal government had previously increased their growth prospects. In the spring, under the impression of the consequences of the Iran war, the “economists” only expected a mini-growth of the German economy of 0.5 percent for 2026 and a GDP increase of 0.8 percent for 2027.
The Council of Experts sees economic growth being slowed by the low so-called productivity growth of companies. This has weakened significantly. It could be increased through new technologies and business models. The economists had also already pointed out high production costs, primarily due to rising social security contributions and energy costs. The federal government is currently struggling with fundamental reforms, such as pensions and the 2027 budget.
The “economic wise men” see Germany’s public finances under increasing pressure. “In the long term, the expected income in the federal budget will not be sufficient to cover the planned expenditure.” Federal spending has increased significantly since the beginning of the 2020s - driven by crisis-related additional spending, expansion of social insurance benefits and higher subsidies.
In addition, the budget will be burdened in the coming years primarily by increasing defense and interest expenses. The so-called debt ratio could rise to up to 98 percent of GDP in 2040. In 2025 it was 63.5 percent. How much the rate increases depends primarily on whether and how quickly the loan financing of defense spending is reduced.
Spending on defense and security is only subject to the debt brake up to a limit of one percent of gross domestic product. Significantly more spending is intended to strengthen the Bundeswehr in the face of threats.
The Council of Experts warns that the financial gap in the federal budget could be between 2.7 and 4.8 percent of gross domestic product in 2040 - depending on how quickly and to what extent loan financing of defense spending is reduced. According to Schnitzer, this would be a gap of 175 billion euros or 300 billion euros.
Schnitzer said that budget consolidation requires a package of measures. The decisions on the reduction of loan financing of defense spending and the necessary consolidation measures should be made during this legislative period. The “economic wise men” call for a reduction in environmentally harmful tax breaks - such as the energy tax break for diesel fuel. In addition, the expansion of the mother's pension should be reversed.
In the medium term, tax increases could be necessary because higher growth cannot realistically close the financing gap. There is also talk of a possible increase in VAT. However, there is also a different opinion in the five-member council - from council member Veronika Grimm.
When handing over the report, Chancellor Friedrich Merz (CDU) said that the message about stable public finances had been received. Germany is the only country among the G7 countries that still has a triple-A rating. “I want it to stay that way.” The top rating signals to investors that there is a very low probability that German government bonds will default. This means that Germany can finance itself cheaply compared to many countries. Schnitzer said Germany might lose its good rating if it just continued like this.
