According to the prognosis of the so-called Wirtschaftsweisen, the German gross domestic product will see a significant real increase this year for the first time since 2022, rising by 1.3 percent. The Council of Experts significantly raised the forecast, which had been calculated at 0.5 percent in the spring, on Wednesday. For 2027, the expectation was raised from 0.8 percent in the spring to 1.0 percent.
Despite the cyclical recovery, however, Germany’s public finances are increasingly under pressure, the figures indicated. In the federal budget and social security, foreseeable expenditures are significantly exceeding foreseeable revenues in the medium term. Monika Schnitzer, chair of the committee, stated that limiting the increase in federal budget spending is unavoidable. Consolidation must be designed to be growth-friendly, and the burdens must be distributed fairly among generations and social groups.
Furthermore, economic growth is being hampered by the low productivity growth of companies. Significant productivity differences exist even within the same economic sector. Top companies, for example, are 3.5 to 5 times as productive as the least productive ones. It was stated that if less productive companies manage to catch up on their productivity deficit, this could have a clear positive growth effect. New technologies and business models could drive the productivity peak and lead to the creation of new highly productive companies.
Notably, the cyclical recovery of the German economy continues despite rising energy prices. Exports and state consumer spending are particularly supporting the overall economic development this year. Next year, state and private consumer spending, as well as state investment, are expected to contribute to GDP growth. Conversely, the increased energy prices are raising inflation during the forecast period. Consumer price inflation is expected to be 2.8 percent in 2026 and 3.3 percent in the coming year.
Meanwhile, the Wirtschaftsweisen see a “need for action of historical magnitude” in the federal budget. Federal spending has increased significantly since the beginning of the 2020s, mainly due to crisis-related extra expenditures, expanded social security benefits, and higher subsidies. In the coming years, increasing loan-financed defense and interest expenditures will further burden the federal budget, causing the debt-to-GDP ratio to rise further.
The Advisory Council on the Economy suggests a gradual return to financing defense expenditures with credit starting in 2031. To achieve this, the threshold set by the debt brake should be raised, which currently determines at what level defense expenditures may be financed by loans. This threshold should be increased by 0.25 percentage points from the current one percent of GDP annually. The path for this return should be enshrined in the basic law.
At the same time, the body sees a growing financing gap emerging. How large this financing gap will be in the long term depends critically on the speed and extent to which the loan financing of defense expenditures is returned. Depending on the scenario, the gap could be between 2.7 and 4.8 percent of GDP in 2040. To close this financing gap, a bundle of measures will be required, particularly a precise reduction of subsidies, social security reforms, and a more efficient design of the tax system, according to the Economic Chiefs. The Economic Chiefs demand that the decisions regarding the return path of credit financing for defense expenditures and the consolidation strategy to close the financing gap be made in this legislative period.
