Economic experts warn of exploding defense spending – and tax increases

Shortly before the crucial meeting of the Bundestag on the 2027 budget, the so-called economists are warning of a massive increase in debt due to defense spending. The budget's financing problems will continue to worsen in the coming years, resulting in a "need for action of historic proportions," said the Council of Experts for the Assessment of Overall Economic Development when presenting its annual report on Wednesday.

Federal spending has increased significantly since the beginning of the decade. Economists attribute this, among other things, to “crisis-related additional spending, expanded social security benefits and higher subsidies.” In the coming years, rising interest and defense spending in particular caused additional pressure.

Through the so-called sectoral exception, defense spending over one percent of gross domestic product has been exempt from the debt brake requirements since 2025. This means that they can be financed on a large scale through loans - and are rising rapidly. According to the report, if it stays that way, the German debt ratio could rise to 98 percent of GDP by 2040 - it is currently around 63 percent.

In order to avoid such a development, economists are calling for the area exemption to be reduced. The threshold is to be increased by 0.25 percentage points annually from the current one percent. This means that a growing share of defense spending would have to be financed from the regular budget again.

Germany needs to increase its defense capability, but the current model is “unsustainable,” warned Monika Schnitzer, head of the economists. “The gradual reduction of loan financing should therefore be enshrined in the constitution.”

The decision on the repatriation path should be made during this legislative period," warns the committee. An expert commission set up by the federal government to reform the debt brake has also debated such a repayment in recent months, but its members were unable to agree on proposals.

According to economists, a whole package of measures is necessary to stabilize the budget. These included the reduction of inefficient and environmentally harmful subsidies, the full implementation of the Old Age Security Commission's proposals - including the abolition of the so-called pension at 63 - and the withdrawal of the mother's pension III.

A gap remains

Even with such reforms, however, there will still be a financing gap that cannot be closed even through higher growth, warns the Council of Experts. Tax increases could therefore be necessary in the medium term. However, these should only be used once all other measures have been exhausted.

To ensure that the austerity measures do not come at the expense of necessary investments in roads, railways and waterways, the committee is proposing the establishment of a transport infrastructure fund. So far, the federal government only has concrete plans of this kind for a fund to finance railways.

In principle, economists, like the government and various institutes, see the economy on a recovery path. Accordingly, economic output is expected to grow by 1.3 percent this year and by 1.0 percent next year. The growth is being driven primarily by surprisingly strong exports and government spending. The Council of Experts sees great potential for more growth in increasing productivity. These are currently very different. Top companies are 3.5 to 5 times as productive as the least productive.