Politics at a bargain-basement level: Budget dispute in Berlin – Why broken promises can be costly for the economy

A fatal signal for the economy, society and further development: Political credibility at junk-market levels

The budget dispute between the CDU/CSU and SPD revolves around billions of euros – but its greatest risk might be harder to measure: the loss of political reliability. The general reduction in electricity tax is on hold for now, new consumption taxes are planned, and at the same time, there is disagreement about additional payments from state institutions. For businesses and private households, it's not just the size of individual charges that matters. Crucially, it's also about whether they can still trust political promises regarding long-term decisions.

However, not every postponement is a broken promise, and not every new tax automatically stifles growth. Likewise, a large federal budget does not prove that every tax relief measure is easily financeable. The crucial question is whether the federal government sets comprehensible priorities, presents sustainable financing plans, and discloses who bears the costs of its decisions. Without this clarity, even a balanced budget can become economically costly – if investments are postponed, consumer choices are made more cautiously, and necessary reforms become increasingly difficult to communicate.

Coalition budget dispute: Between austerity measures, promises of relief, and loss of trust

The most serious damage from the budget dispute between the CDU/CSU and SPD does not stem from a single tax decision. It threatens to occur where businesses and private households can no longer consider political promises a reliable basis for their decisions. The postponement of a general electricity tax cut, new consumption tax plans, and controversial access to state institutions paint a broader economic policy picture that extends beyond the immediate billions of euros involved. However, it would be equally wrong to treat every compromise as a betrayal, every new tax as an impediment to growth, and every budget limit as a pretext.

The crucial economic question is whether the federal government sets comprehensible priorities, secures long-term funding for its measures, and provides private actors with a reliable planning horizon. A government may adapt its policies to changing circumstances. However, it must explain which commitments remain valid, which conditions have changed, and who will bear the costs of its decisions. Without this clarity, even a balanced budget can prove economically costly: through postponed investments, more cautious consumption, and a decreased willingness to support necessary reforms.

The conflict behind the compromise

The agreement of November 11, 2026, did not end key disputes within the coalition, but rather shifted some of them to the CDU/CSU parliamentary group. More than 30 critical statements from their special session have come to light; no supporting contributions have been reported. Paul Ziemiak, General Secretary of the North Rhine-Westphalia CDU, links the lack of electricity tax relief to a significant credibility problem. CDU finance expert Olav Gutting assesses the outcome as a one-sided imposition of social democratic demands. Christian von Stetten, Chairman of the Parliamentary Group for Small and Medium-Sized Businesses, questions in particular the planned access to KfW funds.

In addition, more than twelve members of parliament have spoken out against the proposed sugar tax, and over 20 have signed a declaration against new taxes. These figures are political warning signs, but not a reliable prediction of the final vote. Speeches, signatures, and actual "no" votes are different things. Likewise, the intensity of the criticism alone does not prove that the coalition has lost its parliamentary capacity to act.

Objectively speaking, the claim that the Union has achieved absolutely nothing is too sweeping. A new plastic packaging tax is not slated for introduction in 2027, and the start of the sugar tax has been postponed until early 2028. At the same time, the general reduction in electricity tax remains without funding. This explains the particular explosiveness of the situation: A demonstrably avoided additional burden does not automatically replace an explicitly promised tax relief.

Large budgets, tight margins

The government's draft budget for 2027 projects expenditures of approximately €555.4 billion. Around €524.5 billion is budgeted for 2026. At the same time, federal tax revenues are expected to rise from approximately €387.2 billion to €394.7 billion. Planned net borrowing increases from approximately €98.0 billion to €118.7 billion. These are projected figures and not final budget results.

This scale refutes the notion of a state that is fundamentally incapable of mobilizing funds. However, it does not prove that every additional, permanent spending request or tax cut could be financed without difficulty. A large portion of the funds is tied up by legal obligations, existing programs, and political priorities. Furthermore, the core budget, special funds, and special borrowing authorizations are not simply interchangeable pots of money. In particular, borrowing-financed leeway for defense or infrastructure should not be treated like freely available financing options for ongoing tax cuts.

The extent to which existing commitments are impacting the available fiscal space is demonstrated by interest payments on the credit market. In the draft budget, these payments are projected to rise from approximately €30.3 billion for 2026 to around €41.9 billion for 2027. This represents a significant increase in an item that will not finance a new school, an additional railway line, or any reduction in electricity bills. This necessitates a review of the expenditure structure, but does not justify a blanket devaluation of all debt-financed investments.

Recovery is not yet a growth path

The German economy is not entering this debate from a position of long-term dynamic expansion. Following the declines in economic output in 2023 and 2024, real gross domestic product grew by only 0.2 percent in 2025. The German government's autumn forecast anticipates 1.3 percent growth for 2026, but only 1.1 percent for 2027 and a mere 0.6 percent for 2028. Adjusted for calendar effects, the differences between the years are smaller. It's important to note that forecasts describe expectations based on specific assumptions, not guaranteed results.

The composition of the recovery is at least as important as its magnitude. Recently, exports and public demand in particular have supported the economy, while private consumption and investment have remained weak. A more heavily government-supported recovery can buy time for modernization. However, it is not yet proof that companies will be able to sustainably increase investment and boost productivity more quickly on their own.

Therefore, tax and budget decisions should not be evaluated solely on their short-term cash flow effects. It is also relevant whether they improve the conditions for additional private value creation. Tax relief that is entirely offset by savings has a different short-term demand effect than targeted support for financially constrained households. Conversely, an investment addressing a bottleneck can have a greater long-term impact than a broad but barely perceptible financial benefit. Which effect predominates must be examined based on the specific measure.

Trust is a location factor

Political credibility is not a trivial matter outside of economics. In a market economy, companies make decisions under uncertainty. They calculate energy prices, taxes, financing costs, demand, and regulatory requirements over extended periods. The less reliable the political framework appears, the more important the option of postponing a decision becomes. The budget dispute provides a plausible channel of risk in this regard, but no evidence of precisely quantifiable economic damage.

Projects with high initial costs and long operating lifetimes are particularly vulnerable. These include, for example, production facilities, buildings, logistics centers, and technical infrastructure. If a project's profitability depends on announced tax relief measures, repeated postponements of these measures can alter the investment calculation. This doesn't mean that a single missed tax cut will necessarily lead to a factory being relocated abroad. More often, the initial focus is on the sequencing of projects, smaller expansion plans, or a longer decision-making process.

The formulation of political credibility at junk bond levels should therefore be understood as a pointed value judgment, not as a description of financial facts. Germany's sovereign credit rating continues to be assessed with top ratings and a stable outlook. There is a fundamental difference between a problem of trust in political promises and a downgrade of sovereign creditworthiness. The criticism gains precision when it explicitly acknowledges this distinction.

What the electricity tax actually changes

The standard German electricity tax rate is 2.05 cents per kilowatt-hour. The European minimum rate differentiates between commercial and non-commercial use: it is generally 0.05 cents and 0.1 cents per kilowatt-hour, respectively. This difference is important because a single minimum value is often cited in public discussions. For private households, the rate for non-commercial use is generally the determining factor when comparing it to the standard rate.

A reduction from 2.05 to 0.1 cents would result in a calculated saving of €68.25 before VAT for an annual consumption of 3,500 kilowatt-hours. Assuming full pass-through and an unchanged VAT rate of 19 percent, this would amount to approximately €81 annually. For 5,000 kilowatt-hours, the corresponding gross saving would be around €116. These are illustrative calculations based on the tax rates and do not constitute a guarantee regarding the actual development of an individual electricity tariff.

For individual households, the relief is noticeable, but not a fundamental leap in prosperity. For the federal government, however, the expansion is costly: the current debate estimates an annual funding requirement of around €5.4 billion. The political significance of the measure is greater than its average monthly relief amount because the general reduction was announced in the coalition agreement as a short-term step. What began as a manageable individual saving has thus become a litmus test for political reliability.

Relief is not automatically fair

A uniform reduction per kilowatt-hour is easy to understand, but it doesn't distribute its benefits according to need. Those who consume more electricity from the grid save more in absolute terms. A household with a high income and high consumption can therefore receive a larger euro amount than a low-income household in a small apartment. At the same time, a smaller absolute reduction can be more significant for people with limited financial resources, relative to their available income.

Technical needs and social status should not be equated. High electricity consumption can be related to a heat pump, electric water heating, medical needs, or a large family. Low grid consumption can be due to energy-saving behavior, but also to a private photovoltaic system. Therefore, consumption alone does not provide a reliable indication of a household's economic performance.

Those who aim to specifically alleviate social hardship must therefore examine whether direct transfers or other needs-based instruments are more efficient. Those who, on the other hand, want to facilitate electrification and reduce the tax burden on a key energy source are pursuing a broader goal. Both approaches are legitimate, but they address different problems. Policy becomes unclear when a general reduction in electricity tax is simultaneously presented as the optimal social benefit, a comprehensive economic stimulus program, and a complete solution to the energy price issue.

The economy is more than just industry

The existing electricity tax relief focuses on the manufacturing sector as well as agriculture and forestry. Around 600,000 companies are expected to benefit permanently as a result; the federal government estimates the annual relief at approximately three billion euros. This includes not only large industrial corporations but also numerous medium-sized businesses. Therefore, the blanket statement that only large corporations are being supported is inaccurate.

Nevertheless, a significant problem of demarcation remains from an economic policy perspective. Retailers, many service providers, and parts of the logistics sector do not benefit from a corresponding electricity tax relief simply because they also bear considerable electricity costs. Their specific treatment depends on the legal requirements. A refrigeration plant, a retail company with large sales areas, or a digital service provider can be heavily burdened by energy costs without automatically qualifying for the preferential treatment afforded to manufacturing companies.

The preferential treatment of certain sectors can be justified by international competitive pressure and the risk of energy-intensive production being relocated. However, it should be regularly reviewed to ensure that the sectoral boundaries still reflect an increasingly interconnected economy. Industry, software, maintenance, transport, and trade form value chains. A relief policy that considers only one segment may overlook costs elsewhere and create additional incentives for tax-motivated segmentation.

Electrification requires reliable operating costs

The electricity tax issue affects more than just the next annual bill. When businesses and households are to invest in electrically powered technology, it's not just the purchase price and subsidies that matter. The expected operating costs during use are equally important. A political program that supports new electrical applications but leaves their ongoing costs uncertain can send mixed signals.

For a warehouse with electric conveyor technology, a commercial vehicle fleet, or a building with a heat pump, electricity is a crucial part of the ongoing cost-benefit analysis. However, the significance of the electricity tax should not be overestimated. Procurement costs, grid fees, connection requirements, load profiles, and technical efficiency can be more important for a specific project. A low tax rate cannot compensate for a lack of grid connection or an unsuitable tariff structure.

A convincing strategy would therefore provide a comprehensive picture of long-term electricity costs. This includes transparent government-mandated price components, comprehensible rules for grid expansion, and reliable conditions for flexible usage. From an economic perspective, it makes little sense to initially stimulate investment decisions through subsidies and then call their subsequent profitability into question by frequently changing cost assumptions. Planning certainty should itself be considered an integral part of location policy.

Network charges must not be ignored

The lack of a general reduction in electricity tax does not mean that private households will receive no energy policy relief whatsoever. For 2026, the federal government is subsidizing transmission grid costs with €6.5 billion. This subsidy is planned to continue from 2027 to 2029, with annual funding of €5.525 billion. This latter figure should be considered planned funding and not equated with a completed legislative process.

The subsidy impacts end-customer prices through the calculations of network operators and electricity suppliers. Its specific effect varies depending on the network area and tariff. Therefore, a lower grid load and a reduction in electricity tax are economically related but legally and in terms of distribution policy, distinct instruments. One measure can provide some of the desired relief without automatically fulfilling the promise of the other.

For a fair assessment, both sides must be considered. The government can point to tax relief measures that have actually been enacted. Critics, at the same time, can demand that a concrete tax policy commitment not be retrospectively replaced by a vague overall package. It is particularly important not to count tax relief measures twice: A calculated lower tax burden compared to a scenario without subsidies is different from an actual decrease in the final price compared to the previous year.

A sugar tax needs a different benchmark

The planned sugar tax pursues a different economic approach than the electricity tax. It is not intended solely to generate revenue, but also to influence the consumption of heavily sweetened beverages and manufacturers' recipe decisions. The political compromise envisions a start date of January 1, 2028, and a three-tiered system based on sugar content instead of two. Among the products affected are soft drinks, colas, energy drinks, iced teas, and fruit juice drinks with added sugar.

In principle, such a levy can be justified by consequential costs that are not borne solely by the respective consumers. In a solidarity-based healthcare system, diet-related illnesses can create additional burdens for other contributors. At the same time, the connections between diet, illness, and individual choices are complex. A single product tax can therefore complement, but not replace, a comprehensive prevention policy.

Simply equating every new tax with economic harm is too simplistic. Crucial factors are targeting accuracy, avoidance options, administrative burden, and actual impact. It would be equally inadequate to declare a tax sensible solely because of its public health label. If the design is primarily intended to generate guaranteed revenue but results in little improvement in products or changes in consumer behavior, the preventative effect remains weak.

What international experience shows

The British beverage tax illustrates that manufacturers can respond to tax thresholds by modifying their recipes. Between 2015 and 2024, the sales-weighted average sugar content of the surveyed beverages fell by approximately 47 percent. This development provides relevant evidence of the effectiveness of a well-designed incentive system. However, it should not be interpreted as if every aspect of the observed change is solely attributable to the tax, or as if the British results can be directly applied to Germany.

For Germany, model calculations regarding potential long-term effects are also available. A study with a timeframe from 2023 to 2043 calculated potential macroeconomic savings of around €16 billion for a tiered manufacturer's levy. Approximately €4 billion of this would be attributable to healthcare costs. These figures represent neither annual savings nor actual budget revenues. They are based on assumptions about changes in behavior, formulations, and health trends.

The comparison suggests a more nuanced perspective. A well-designed levy can be successful even if it generates less revenue than initially expected because manufacturers reduce sugar content. This also implies a fiscal policy limit: A shrinking tax base should not be used to permanently finance firmly budgeted expenditures without sufficient safety margins. Public health success and fiscal yield can diverge.

Who will bear the new levy

The fact that a tax is formally levied on manufacturers or importers doesn't necessarily mean who ultimately pays the price. Depending on the competitive landscape, it can manifest as higher consumer prices, lower margins, altered purchasing conditions, or a combination of these adjustments. Added to this are costs for recipe development, product testing, packaging changes, and administration. For smaller manufacturers, these fixed costs can have a relatively greater impact.

A careful analysis is also needed from a distributional perspective. If low-income households spend a larger share of their budget on these beverages, a price increase could disproportionately affect them. At the same time, health improvements can be particularly valuable in areas where preventable illnesses incur high social costs. A sound assessment must consider both the financial burden and potential health benefits together, rather than focusing on only one aspect.

A later start date of 2028 could be economically advantageous if the additional time can actually be used for necessary adjustments. However, a postponement alone does not create planning certainty. For this to happen, product definitions, thresholds, verification rules, and transitional conditions must be established well in advance. The government should not require manufacturers to make adjustments while simultaneously leaving the relevant regulations open until shortly before the start date.

At KfW, legal clarity is paramount

The planned additional transfer of €1.5 billion from KfW is particularly sensitive. According to the current wording of Section 10 of the KfW Act, no profit distribution will take place; profits must be allocated to reserves in accordance with legal requirements. Therefore, the objection to a standard distribution has a concrete legal basis. A political agreement alone does not replace statutory authorization.

However, this does not automatically mean that every conceivable transfer of funds would be unlawful under all circumstances. The decisive factors would be the precise structure, the relevant legal bases, and any applicable statutory amendments. Without this examination, a conclusive allegation of a legal violation cannot be reliably established. Likewise, the existing statutory exclusion should not be treated as if it were a non-binding recommendation.

The economic significance of legal clarity extends beyond individual cases. A state-owned development bank requires a comprehensible framework for capital accumulation, risk assumption, and its promotional mandate. If this framework is changed, it should be done transparently and accompanied by a justification that is sustainable in the long term. The state, in particular, should avoid demanding reliability from private investors while simultaneously treating the rules for its own institutions merely as an obstacle to short-term budget planning.

Funding capital is not free surplus

In the first nine months of 2026, KfW committed €87.9 billion in financing. Of this, €57.0 billion was attributable to domestic promotional lending. The group's net profit during this period was approximately €1.4 billion, and its equity capital stood at €42.2 billion at the end of September. Its Common Equity Tier 1 (CET1) ratio was 27.5 percent. These figures demonstrate a strong promotional bank, but not an unlimited supply of readily available government funds.

The discussed sum of €1.5 billion is roughly equivalent to a significant portion of the most recently reported annual or interim profits. Nevertheless, a direct comparison would be methodologically flawed. Group profit, individual financial statements prepared in accordance with commercial law, liquid assets, and legally distributable amounts are distinct entities. Furthermore, a sound decision must consider the actual available profit and the impact of a withdrawal on capital planning and eligibility for subsidies.

Such a transfer would not automatically plunge KfW into an acute financing crisis. However, it would not be free either. Capital that does not remain within the development bank cannot, in principle, contribute to additional risk mitigation or to strengthening future funding opportunities. The magnitude of this effect cannot be reliably quantified without a precise capital and risk calculation. Therefore, a blanket leverage factor that immediately derives a supposedly lost loan volume from €1.5 billion would be misleading.

Real estate assets need their own calculation

An additional €1.5 billion is also under consideration for the Federal Agency for Real Estate (BImA). However, its legal situation differs from that of the KfW (German Development Bank). The BImA Act explicitly stipulates transfers to the federal budget based on the business plan. The amount is to be based on the annual surplus. Therefore, a distribution ban from the KfW Act cannot be applied to the BImA.

The Federal Agency for Real Estate (BImA) manages properties totaling approximately 453,000 hectares and more than 38,300 apartments. It also performs extensive tasks related to federal government properties. Therefore, whether a higher transfer of funds is economically justifiable depends not only on a reported profit. Liquidity, maintenance, new construction obligations, renovation needs, and the financing of already planned projects must also be examined.

Particularly problematic would be any relief to the current budget achieved by neglecting the maintenance of public assets. Postponed renovations could increase future costs or impair the usability of buildings. Conversely, it is not inherently wrong to transfer economically dispensable funds to the federal government as the owner. The real question, therefore, is not whether public real estate income should be used at all, but rather how much actually remains available after a sound investment and maintenance plan.

Rebookings do not create new prosperity

Transfers from public institutions can generate additional revenue in the federal budget. However, from a macroeconomic perspective, this does not yet result in any additional real benefit. The money is initially redistributed within the state-controlled sector. Whether this is beneficial depends on whether it is subsequently used more productively or causes greater damage elsewhere.

Several factors need to be distinguished here. A better cash balance in the federal budget is not the same as higher overall net assets. Nor does it automatically lead to a corresponding improvement in all statistical deficit indicators. Their treatment depends, among other things, on how the institution in question is classified and the nature of the transaction. A precise assessment therefore requires more than simply adding up the announced billions.

Above all, one-off revenues should not be presented as a permanent solution to recurring financing problems. An annual tax cut requires financing that extends beyond the first fiscal year. A special levy can, at best, serve as a temporary measure, provided a subsequent structural solution is credibly established. Without this prospect, the conflict is merely postponed, while asset buffers or future revenues may diminish.

The debate about workload needs honesty

Sensitivity to new taxes doesn't arise in a vacuum. For a single, average-earner without children, the gap between total employer costs and available net income in Germany was 49.3 percent in 2025. The OECD average was 35.1 percent. This so-called tax wedge indicator includes income tax as well as employee and employer contributions to social security. It is explicitly not to be equated with a general income tax rate or the burden on each household.

This indicator nevertheless explains why even small additional charges can encounter considerable political resistance. Employees don't consider their electricity bill separately from social security contributions, rent, transportation, and other living expenses. Similarly, companies don't differentiate in their overall calculations based on which government department decided on a charge. Therefore, an economic policy strategy must consider the interplay of these instruments.

At the same time, the budget compromise has so far failed to achieve a complete agreement on addressing bracket creep. This refers to the increasing tax burden when incomes merely keep pace with inflation but rise into higher tax brackets. Anyone who wants to credibly promise tax relief must also consider such less visible mechanisms. Political honesty demands that explicit tax rate increases and gradual increases in the tax burden not be judged differently.

Saving must not make the future more expensive

A comprehensive review of expenditures is necessary. However, it should differentiate between consumption-related obligations, effective investments, and unproductive subsidies. A blanket cut based on the "lawnmower principle" may seem simple in the short term, but it can lead to significant subsequent costs. For example, postponing maintenance may initially improve the annual budget, but it doesn't address the underlying economic task.

The municipal level illustrates the scale of unresolved issues. The projected investment backlog perceived by municipalities in the 2026 Municipal Panel amounts to €231.2 billion. Of this, €68.9 billion is allocated to schools and €53.7 billion to roads. This figure is based on survey data and projections, not on a comprehensively verified collection of construction-ready projects with binding cost estimates. Nevertheless, it clearly demonstrates the need for modernization.

Therefore, it would be economically insufficient to demand a reduction in electricity tax simply because its financing requirements appear small in relation to the overall federal budget. Even comparatively small amounts have alternative uses. The crucial factor is which combination of tax relief, maintenance of public infrastructure, and additional investments provides the greatest sustainable benefit. This requires verifiable objectives and a willingness to examine the impact of even politically favored expenditures.

Leadership means shared responsibility

The conflict between Friedrich Merz and Lars Klingbeil can be framed politically as a power struggle. Economically, however, the more important question is whether the Chancellor, Finance Minister, and parliamentary groups can agree on consistent priorities. The coalition agreement includes a promise of a reduction in electricity taxes for everyone. The lack of corresponding funding is a real problem. Neither side can permanently rely solely on the more favorable aspect of these two commitments.

Merz must be judged on whether he translates his government's key promises into a viable budget framework. Klingbeil must explain why certain expenditures and revenue sources take priority and how the financial plan will be stabilized in the long term. The CDU/CSU parliamentary group, in turn, can reject new taxes, but must then specify concrete consequences for expenditures, other revenues, or legally permissible financing. A "no" without a solid alternative will not close any budget gap.

The SPD, too, cannot use the concept of social stability as a substitute for every efficiency assessment. Social welfare benefits can mitigate risks and ensure social cohesion; however, this does not mean that every existing system is optimal. Conversely, reversing planned cuts to parental leave benefits, housing allowance, and child support advances is not automatically irresponsible spending. Its evaluation depends on target groups, work incentives, administrative implementation, and offsetting financing.

Credible commitments require financing rules

A sound correction begins with classifying political promises according to their actual status. A goal in the coalition agreement, a cabinet decision, a parliamentary agreement, and an existing law must not be treated as identical levels of binding force. Citizens and businesses must be able to recognize which measures are already legally and financially secured. This requires not a new communications campaign, but a clear and verifiable presentation.

For lasting tax relief, the government should disclose a multi-year financing plan. This includes a clear statement outlining which expenditures will be eliminated, which revenues are realistically expected, and what risks exist. Anticipated growth gains can be considered, but should not serve as guaranteed upfront financing. Similarly, uncertain savings from digitalization or deregulation should not be fully allocated in planning before the corresponding changes can be implemented.

State-owned institutions require a separate review. Legal admissibility, liquidity, and long-term fulfillment of their tasks must be demonstrated in each case. KfW and BImA must not be treated as interchangeable reserves. For new incentive taxes, target achievement and revenue development should be reviewed separately. A levy intended to improve health must be measured by this effect and not solely by its contribution to the next budget shortfall.

The actual implementation will be crucial

For businesses, the appropriate response to the dispute is neither blind optimism nor the assumption of an imminent economic collapse. Investments should be based, wherever possible, on applicable law and verifiable cost assumptions. Relief measures that have not yet been financed should be included in calculations as potential improvements, not as a guaranteed basis. For long-term projects, it is advisable to examine whether their economic viability remains intact even without the anticipated political support.

This places a more demanding standard on the government than simply securing a parliamentary majority. It must demonstrate that a tax commitment is actually implemented, that any new burden is technically justified, and that budget relief is not merely achieved at the cost of later increased expenses. Neither an unchanged high level of spending nor a short-term successful cut proves, in itself, sound economic policy. What matters is efficiency, distribution, and long-term sustainability.

The fatal signal, therefore, would not be a coalition arguing about priorities. Such disagreement is part of the democratic process. What would be dangerous, rather, is a persistent practice in which tax relief remains non-binding, new burdens are imposed without a convincing overall strategy, and institutional rules are only reviewed after a political agreement has been reached. Germany's economic development does not need as many promises as possible. It needs a state whose commitments are precise enough to inform decisions and reliable enough to be trusted even after the next budget round.