The Dusseldorf Institute for Macroeconomics and Business Cycle Research (IMK) has issued a stark warning against permanently exempting defense spending from Germany’s enshrined debt brake, raising critical questions about the government’s current fiscal strategy. Their latest study, reported by the Süddeutsche Zeitung, suggests that maintaining the present framework – which allows for a significant portion of defense expenditures to be financed through borrowing – risks pushing Germany’s national debt to nearly 100% of Gross Domestic Product (GDP) by 2050. This represents a substantial increase from the current debt-to-GDP ratio, which stands at approximately 65% for the federal government, states and municipalities.
The IMK’s caution carries particular weight given the institute’s longstanding advocacy for a more flexible interpretation of the constitutional debt brake. They argue that the current compromise, forged after the 2021 Bundestag election, is fundamentally counterproductive.
“Economically, the debt brake reform of Spring 2025 was arranged the wrong way around” stated IMK director Sebastian Dullien in the Süddeutsche Zeitung interview. “It would have been beneficial to grant generous borrowing allowances for investments and create temporary leeway for defense. Instead, we’ve enshrined limited scope for investment and an unlimited credit opportunity for defense.
Since the beginning of this year, defense spending, aid to states like Ukraine facing ongoing aggression and costs associated with disaster and civil protection have been permissible to finance entirely through borrowing, exceeding a 1% of GDP threshold. This decision was a direct response to Russia’s aggressive foreign policy and the looming threat of reduced US military support for Europe if allies failed to significantly increase their defense expenditures.
However, the IMK’s study emphasizes that defense outlays predominantly lack the characteristics of investment and therefore exert limited positive impact on Germany’s long-term economic growth. As such, they recommend shifting away from reliance on new debt and funding these expenditures, to a significant degree, through taxation. The institute suggests considering a “one-off, earmarked special levy on very large assets” as a potential revenue source. Their analysis concludes that long-term debt financing should be restricted to additional investment spending by the state.
Contrastingly, the institute views favorably the establishment of the Special Fund for Infrastructure and Climate Neutrality (SVIK), a credit-funded initiative totaling €500 billion. Designed to modernize railways, bridges, roads, digital infrastructure and energy networks over twelve years and resolve a long-standing investment backlog, the SVIK is projected to boost economic growth by 1.4% by the mid-2040s, according to IMK calculations. Critically, the resulting increase in the national debt is estimated to be a relatively modest 11 percentage points, rapidly returning to current levels upon full utilization of the fund. This distinction highlights a fundamental divergence in fiscal philosophy: prioritizing growth-oriented investment versus potentially unsustainable, strategically motivated debt accumulation.
