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The German government has endorsed a draft budget for 2025, a critical step towards addressing the nation’s economic and security challenges amidst a constrained financial landscape.

The budget, approved by Chancellor Olaf Scholz’s cabinet on Wednesday, sets a total spending limit of €481 billion, inclusive of a record €78 billion for investments and net borrowing of €43.8 billion.

The next step will be securing approval from the Bundestag, expected in November.

Finance Minister Christian Lindner emphasised the significance of adhering to the debt brake, a constitutional cap on spending, as a cornerstone of Germany’s fiscal stability.

“We are complying with the debt brake, which makes us an anchor of stability in Europe,” Lindner stated. He underscored the importance of economic growth to create new fiscal opportunities: “New room for manoeuvre in the budget can only be created through more economic growth.”

The 2025 budget is notable for its ambitious investment plan and the strategic allocation of funds to bolster Germany’s defence and social infrastructure.

The budget outlines mid-term financial planning until 2028, coinciding with the expiration of the armed forces’ special fund designed to meet NATO’s minimum spending goals.

Key focus areas

The “traffic light” government, comprising the Social Democratic Party (SPD), the Greens, and the Free Democratic Party (FDP), aims to invigorate the economy, sustain social benefits, and enhance national security.

The Defence Ministry, led by the SPD’s Boris Pistorius, will receive additional funding, enabling Germany to exceed NATO’s 2% Gross Domestic Product (GDP) defence spending target with an allocation of €75.3 billion. Security agencies, including the Federal Police and Customs, will gain from nearly €1 billion in subsidies.

Support for families features prominently, with increased childcare benefits and a higher child supplement for low-wage working parents. The budget also plans for approximately €23 billion in tax relief for 2025 and 2026, which includes enhanced deductions for income and payroll taxes.

The German government remains dedicated to supporting Ukraine, although aid will decrease from €8 billion in 2024 to €4 billion in 2025. The government expects that the G7’s $50 billion loan package, derived from frozen Russian assets, will cover most of Ukraine’s needs.

Fiscal challenges and strategies

Budget negotiations were arduous in the weeks heading to the cabinet approval, exacerbated by the war in Ukraine, Germany’s recession, and differing coalition party priorities.

Lindner’s approach to budget negotiations focused on fiscal restraint, aiming to balance the budget by curbing excessive state expenditures. Despite this, most ministries will receive increased funding compared to previous promises, with the exceptions being the Transport, Development, and Building and Housing Ministries, which face slight reductions.

According to Deutsche Bank, which published a preview of potential scenarios for the German budget in 2025, despite the challenging economic environment and fiscal constraints, Germany’s 2025 budget aims to balance robust investments with prudent borrowing. Fiscal policy is expected to be restrictive in 2024 but broadly neutral in 2025, as the government navigates these complex financial waters to foster stability and growth.

Addressing the Budget gap

To bridge a €17 billion shortfall between projected spending and revenue, the government plans to revise the accounting for interest expenses and expects an economic growth package to generate an additional €6 billion in tax revenue.

There is also a proposal to reallocate unused funds from the KfW Development Bank’s gas price brake back to the federal budget, though this may raise constitutional concerns.