Germany is experiencing one of the most difficult budget crises: Between debt brake, security and infrastructure
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Published on: September 7, 2025 / Updated on: September 7, 2025 – Author: Konrad Wolfenstein
Germany is experiencing one of the most difficult budget crises: Between debt brake, security and infrastructure
Germany's future plan costs billions: Is this a rescue for dilapidated roads and the Bundeswehr – or a disaster?
The ongoing budget turbulence of the federal government
Germany is experiencing one of the most difficult fiscal periods in its recent history. Following the collapse of the traffic light coalition in November 2024, the country is once again facing fundamental problems in financing government functions. The current situation is a stark reminder of the turmoil that contributed to the downfall of the previous government and casts a new light on the structural weaknesses of German fiscal policy.
Since January 1, 2025, Germany has been operating under provisional budget management after the Bundestag failed to pass a regular budget for the current year. This extraordinary situation is the direct result of the political crisis that led to the dismissal of FDP Finance Minister Christian Lindner in November 2024 and the collapse of the traffic light coalition.
The federal government's new draft budget for 2025 envisions spending of €503 billion, an increase of €26.2 billion over the previous year. At the same time, the government plans net borrowing of €81.8 billion, dramatically different from the €39 billion of the previous year. This massive increase in new debt is made possible by fundamental changes to the debt brake, which were passed in March 2025 with a two-thirds majority of the CDU/CSU, SPD, and Greens.
Constitutional Court ruling as a turning point
The roots of the current budget turmoil date back to November 2023, when the Federal Constitutional Court issued a groundbreaking ruling on the budget policy of the "traffic light" government. The judges declared the repurposing of €60 billion from the Corona Special Fund for climate protection measures unconstitutional. This ruling deprived the then government of the financial basis for numerous planned projects and significantly exacerbated the already existing tensions between the coalition partners.
The court argued that the connection between the coronavirus pandemic, as an exceptional emergency, and the subsequent use of the funds for climate protection projects had not been sufficiently explained. Furthermore, accumulating debt in reserve violated the principle of annual budgetary management. The decision marked the first time that Germany's highest court had ruled on the debt brake, setting new standards for fiscal policy.
The consequences of this ruling were far-reaching. Federal Finance Minister Lindner immediately imposed a spending freeze on the Climate and Transformation Fund and announced the closure of the Economic and Stabilization Fund at the end of the year. The government's electricity and gas price caps subsequently expired, and numerous climate protection projects had to be re-examined.
The ruling exacerbated the already simmering conflicts within the traffic light coalition. While the SPD and the Greens pushed for new debt for investments, the FDP insisted on strict adherence to the debt brake. These incompatible positions ultimately led to a deadlock that lasted almost a year before the coalition finally collapsed.
Reform of the debt brake under new government
Following the early federal elections in February 2025, the CDU/CSU and SPD agreed on a comprehensive reform of the debt brake in their exploratory talks. Even before the new Bundestag was constituted, the 20th German Bundestag passed an amendment to the Basic Law on March 18, 2025, with the votes of the CDU/CSU, SPD, and Greens, which provides for three significant relaxations.
The most important innovation concerns the establishment of a special fund for infrastructure and climate protection, amounting to €500 billion, outside the debt brake, for twelve years. This massive investment package is intended to modernize Germany's dilapidated infrastructure and help achieve its climate goals. Of the €500 billion, €100 billion will go directly to the states and municipalities, a further €100 billion is available for investments from the Climate and Transformation Fund, while the federal government can access €300 billion for additional investments.
The second important change creates an exception for defense spending. Expenditures for defense, civil defense, intelligence, and cybersecurity that exceed one percent of gross domestic product are exempt from the debt brake. This provision allows the federal government to spend significantly more money on security without violating constitutional debt limits.
Third, the states will be granted an additional borrowing option of 0.35 percent of their gross domestic product, giving them significantly more budgetary flexibility. This change is intended to particularly benefit local authorities, which often suffer from chronic underfunding.
Massive increase in defense spending
The current draft budget proposes a dramatic increase in defense spending. With a total volume of approximately €86.5 billion, Germany's military spending is expected to reach a new record high in 2025. This represents an increase of €14.7 billion over the previous year and will reach the NATO target of two percent of gross domestic product for the first time in decades.
Of the €86.5 billion, €62.4 billion will be allocated to the regular defense budget, and a further €24.1 billion will be allocated from the Bundeswehr special fund. The largest increase will be for military procurement, which will rise by €5.5 billion to €8.2 billion in the individual budget. An additional €24.1 billion will be provided from the special fund for procurement, representing a total of €9.8 billion more than the previous year.
Long-term financial planning envisages even more drastic increases. The key figures for the coming years show that the individual defense budget is expected to grow to €82.7 billion in 2026, €93.4 billion in 2027, €136.5 billion in 2028, and €152.8 billion in 2029. This would mean that defense spending would increase by a factor of 2.45 by 2029, more than doubling its share of the federal budget from the current 12.4 percent to 26.6 percent.
The original Bundeswehr special fund of €100 billion, created after the Russian attack on Ukraine in 2022, has now been almost completely allocated. According to the Frankfurter Allgemeine Zeitung, exactly €99.999 billion of the €100 billion has already been committed. This demonstrates how quickly the financial injection for the Bundeswehr, initially perceived as generous, was used up.
Infrastructure investments as a key challenge
Along with defense, Germany's dilapidated infrastructure represents one of its greatest financial challenges. Experts estimate the investment needs for highways, railways, and energy infrastructure alone at around €400 billion over the next ten years. However, the total requirement is likely to be considerably higher, as there is currently no comprehensive inventory of all infrastructure expenditures.
The investment requirement for federal road infrastructure is estimated at over €57 billion between 2025 and 2028. According to the Federal Ministry for Digital and Transport, the railway will require €63 billion over the same period. The financial need for energy infrastructure is particularly dramatic, with investment of up to €270 billion in onshore and offshore facilities required by 2037 due to the energy transition.
The new special fund for infrastructure and climate neutrality is intended to help close these massive financial gaps. More than nine billion euros will be made available for investments in reliable rail infrastructure as early as 2025. Sixty-five billion euros are earmarked for improving childcare and digital education, while at least four billion euros from the special fund are to be invested annually in digitalization.
The investment package also includes measures for research and development, broadband expansion, and a transformation fund for hospitals. Money will also flow into schools and kindergartens to modernize the educational infrastructure, which has been neglected for years. Total transport investments will amount to approximately €166 billion by 2029.
Criticism from experts about budget management
The massive increase in national debt is met with mixed reactions among financial experts. The Academic Advisory Board at the Federal Ministry of Finance has issued a recent report on the reform of the debt brake and warns of the risks associated with the new regulations. The experts emphasize that while a growth-oriented use of the new lending scope is theoretically possible, such a use of financial resources is not mandatory.
Critics complain that the Basic Law, due to its prominent position in the regulatory framework, has been drafted too broadly, thus allowing for imprecise uses. The new debt brake should by no means end the discussion about further reforms, as there is a need for more rather than less reform. The danger, they argue, is that the new debt options could be used not specifically for productive investments, but for consumption-related spending.
Economists like Peter Bofinger of the University of Würzburg describe the old debt brake as harmful to the future, as it has hampered necessary investments in railway modernization, building renovation, and semiconductor factories. Jens Südekum of Heinrich Heine University Düsseldorf argues that Germany has never been excessively indebted by international standards and that its debt ratio is very low.
Other experts warn of the long-term consequences of an overly loose debt policy. Friedrich Heinemann of the Center for European Economic Research emphasizes that a complete abolition of the debt brake would be disastrous and would also leave future generations with a fiscal mess. The challenge, he says, lies in finding the right balance between necessary investments and fiscal responsibility.
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Intergenerational justice at risk: Who pays for infrastructure and defense?
Legal uncertainties and constitutional issues
The new interpretation of the debt brake raises significant legal questions. Legal experts doubt whether the exemption for defense spending will remain constitutional in the long run. The provision, which exempts spending above one percent of gross domestic product from the debt brake, creates incentives for an unlimited expansion of military spending.
Particularly problematic is the definition of expenditures that fall under the area exception. In addition to pure defense spending, it also covers civil protection, intelligence services, cybersecurity, and aid to states attacked in violation of international law. This broad definition could lead to an increasing amount of expenditure being subsumed under the security label in order to circumvent the debt brake.
Constitutional lawyer Hanno Kube criticized proposals to spread the repayment of emergency loans over very long periods. Repayment must be made within a reasonable period of time, and the burden on an entire future generation already seems quite long. Simply postponing repayment without a sound, independent justification is unacceptable.
The legal uncertainties are compounded by the complexity of the new regulations. The special fund for infrastructure and climate neutrality is set to run for twelve years, but it remains unclear what will happen after that period. There is a risk that politicians will become accustomed to the higher spending levels and demand further exceptions to the debt brake.
Impact of provisional budget management
The provisional budget, in effect since January 1, 2025, demonstrates the limits of political capacity in Germany. According to Article 111 of the Basic Law, expenditures may only be incurred to the extent necessary to maintain legally established institutions, fulfill legally justified obligations, or continue previously approved projects.
These restrictions have concrete implications for government activity. New projects can only be initiated if they are objectively and time-critically necessary. This makes it difficult for the government to respond to current challenges or launch new policy initiatives. Already approved funding programs or construction projects will continue, but the launch of new projects requires more detailed justification.
For the 2025 provisional budget, the Federal Ministry of Finance has determined that material expenditures may amount to up to 45 percent of the amount estimated in the traffic light coalition's original draft budget. This quota was later increased to 70 percent to reflect the current schedule for the budget preparation process.
According to current plans, the provisional budget is scheduled to end in October 2025, when the new budget is finally adopted and announced. This would be one of the longest periods of provisional budget management in the history of the Federal Republic of Germany, underscoring the severity of the current political and financial crisis.
International perspective and NATO commitments
Germany's budget turmoil is also being viewed critically internationally. Germany was only able to fulfill its NATO commitment to spend at least two percent of its gross domestic product on defense this year, after years of missing this target. The drastic increase in military spending is also a reaction to the ongoing war in Ukraine and the changing security situation in Europe.
US President Donald Trump has even demanded that NATO partners increase defense spending by five percent of their gross domestic product. Based on these demands, the German defense budget, at current levels, would have to amount to 150 to 200 billion euros annually, making it by far the largest single item in the federal budget. This magnitude demonstrates the enormous financial challenges that could lie ahead for Germany.
The trend toward rearmament can be observed worldwide. The United States currently spends around 3.5 percent of its gross domestic product on defense, while Poland spends more than four percent. Germany's planned spending is moving in a similar direction, fundamentally changing budget planning priorities.
The international dimension is also evident in infrastructure investments. Germany must not only modernize its own dilapidated infrastructure, but also make its contribution to European integration and competitiveness. The transformation to a climate-neutral economy by 2045 requires massive investments that cannot be achieved without additional debt.
Long-term impacts on future generations
The massive borrowing for infrastructure and defense raises fundamental questions of intergenerational equity. Proponents argue that investments in infrastructure and climate protection benefit future generations and improve their living conditions. An intact and modernized infrastructure is the foundation for economic growth and prosperity.
Critics argue that high levels of debt burden future generations and limit their fiscal flexibility. Debt service costs will consume an increasingly large share of the federal budget, tying up resources that will then no longer be available for other tasks. Rising interest rates could exacerbate this problem.
The debate about the right balance between investment and debt is exacerbated by demographic developments. An aging society is leading to rising healthcare and pension costs, while the number of contributors is declining. This development is increasing the pressure on public budgets and making sustainable fiscal policy even more important.
The new debt brake attempts to address these challenges by taking a more differentiated approach to investment and consumption. Whether this succeeds depends on whether the additional funds are actually used for productive investment or whether they flow into general government consumption.
Economic challenges and weak growth
Germany is experiencing a prolonged period of economic weakness, which further complicates budget planning. Growth forecasts are modest, and Germany's international competitiveness as a business location is in question. The massive investment offensive is also intended to stimulate economic growth and improve the conditions for doing business.
The government is committed to a modernization push for the entire country, financed through the special fund. Investments in digitalization, research, and innovation are intended to prepare Germany for the future and create new growth impulses. The transformation of the economy toward climate neutrality is seen as an opportunity for technological leadership and new business models.
At the same time, the government is planning structural reforms to strengthen competitiveness and ease the burden on citizens and businesses. Faster procedures and less bureaucracy are intended to improve the framework for investment. At the same time, strict funding restrictions and the review of all government tasks for their necessity are intended to ensure budgetary discipline.
The challenge lies in finding the right balance between investment and consolidation. Too little investment jeopardizes the country's future viability, while too much debt burdens future generations. The new debt brake is intended to facilitate this balancing act, but its effectiveness remains to be proven in practice.
Political stability and democratic legitimacy
The repeated budget crises also raise questions about Germany's political stability. The collapse of the traffic light coalition over fiscal issues demonstrates how difficult it has become to find viable compromises. The ideological differences between the parties regarding the assessment of debt and investment have proven insurmountable.
While the new coalition of the CDU/CSU and SPD enjoys a clear parliamentary majority for its budget policy, tensions are inevitable here as well. The SPD is pushing for more investment and social justice, while the CDU/CSU traditionally stands for fiscal discipline and debt limitation. The reform of the debt brake was a compromise, but whether it is sustainable in the long term remains to be seen.
The democratic legitimacy of the massive debt is also disputed. The amendment to the Basic Law was passed by the former Bundestag, even though it had already been determined that new elections would take place. Critics see this as an attempt by the outgoing members of parliament to commit future governments to a specific policy.
The complexity of the new budget rules makes it difficult for citizens to understand the implications of the decisions. Special funds and sectoral exemptions create a lack of transparency that undermines democratic oversight. There is a risk that more and more spending will be outsourced from the regular budget to avoid political conflicts.
Germany's current budget planning is paradigmatic of the challenges facing modern democracies in the 21st century. The tensions between short-term political cycles and long-term investment needs, between fiscal responsibility and societal demands, and between national priorities and international obligations shape the debate. The coming years will show whether the new architecture of the debt brake meets these complex requirements or whether further reforms are necessary.
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