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 warns of a task of “historic proportions”. Politicians will not be able to avoid making tough decisions, says chairwoman Monika Schnitzer. The currently comparatively robust economy is doing little to change this.
The Council of Experts 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.
Many research institutes and the federal government had previously increased their growth prospects. The government also expects gross domestic product (GDP) to increase by 1.3 percent this year. In the spring, under the impression of the consequences of the Iran war, the “economists” only expected 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, for example in pensions. At the beginning of October, Federal Economics Minister Katherina Reiche (CDU) emphasized the need for structural reforms. Growth is on shaky ground.
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.” The federal government's net borrowing will increase significantly by 2030 due to the additional special funds and, above all, increased defense spending and will remain at a high level for a longer period of time - if it is not possible to reduce the so-called sectoral exception for defense. “This means that the debt ratio and interest expenses will also increase.”
When handing over the report, Chancellor Friedrich Merz (CDU) said that the message about stable state 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.
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. Based on GDP last year, that would be around 120 billion euros or around 215 billion euros. According to the Council, how large the gap will be in the long term depends crucially on how quickly and to what extent the loan financing of defense spending is reduced. In its financial planning up to 2030, the Ministry of Finance currently expects a financial gap of around 50 billion euros in 2030.
A reduction in debt financing is necessary, said Schnitzer. Budget consolidation requires a package of measures. 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 withdrawn.
In the medium term, tax increases could be necessary because higher economic 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.
