Germany set for near-record new borrowing in 2027 after budget deal

Germany is set to raise its borrowing by more than $222 billion next year, the second-highest amount since World War Two, after parliamentarians backed a budget plan that Chancellor Friedrich Merz hopes will revive his unpopular government.

Total spending is also set at $620.3 billion, up 7% from the previous year, with tax income reaching $436.7 billion.

Parliament's budget committee agreed to the package, after weeks of haggling between coalition partners that saw plans for taxes on plastics and sweetened drinks as well as welfare cuts dropped or delayed. The budget, which proposes spending of $607 billion, is now free to be passed by parliament.

Merz's government has vowed a major push to strengthen Germany's core infrastructure and rebuild its military after decades of underinvestment and last year agreed to ease borrowing limits on defense spending.

But it has struggled to reconcile the competing priorities of his conservative Christian Democrats (CDU) and their centre-left Social Democrat (SPD) partners, who joined forces after last year's election.

Merz, whose personal approval ratings have plunged since his election last year, has promised a wide-ranging programme of reforms to the pension, tax and social security systems but he has struggled to keep the coalition on course.

"The key event is that they passed it," said Holger Schmieding, chief economist at Berenberg Bank, who said the lack of major cuts to welfare spending and the overall tax burden reflected the problems reaching agreement between the coalition partners.

Total new borrowing is almost as high as 2021

Total new borrowing reached $231.9 billion, just under the record $237.4 billion recorded in 2021 during the COVID-19 pandemic, the figures showed.

That included new borrowing of some $135.5 billion from the core budget, which does not include additional borrowing authorised under special measures to allow greater spending on infrastructure and defense agreed last year.

"The budget is based around consolidation, investment and strengthening cohesion," Christian Haase, a CDU member of the parliamentary finance committee, said. "Civil defense, military defense and investment in transport and research, on the one hand, are complemented by a strong welfare state."

This week, Germany's Council of Economic Experts forecast economic growth of 1% next year but said the government had to rein in spending on defense and retirement benefits to get runaway deficits under control.

Thorsten Rudolph, an SPD member of the budget committee, said the budget reflected the need to protect working families and children and maintain social cohesion, despite the pressure on public finances.

"We make savings to hold the budget together – but not at the expense of what holds our country together and drives it forward," he said.

Criticism

Agreement on the package concealed unhappiness among some in Merz's party about what they saw as excessive concessions to the SPD and a "structural imbalance" in the decision making process.

"If the SPD sticks to its 'no', the original proposal will generally stand," said Andreas Mattfeldt, a CDU member of the budget committee.

For their part, opposition parties accused the government of concealing borrowing and spending on basic income support.

The far-right Alternative for Germany said the government was "running up debts as if there were no tomorrow."

"This debt spree is unprecedented on a global scale. It threatens to render Germany completely unable to act very soon," joint party leaders Alice Weidel and Tino Chrupalla said in a statement.

Late on Wednesday, officials in the coalition agreed to scrap a proposed tax on plastic packaging materials and to delay a tax on sugared drinks until 2028. They also rolled back plans to cut benefits for the children of low-income families.

A planned cut to an electricity tax that had been championed by Merz was delayed after the committee failed to reach agreement on $5.4 billion in financing measures to pay for it.

However, Merz is expected to discuss this issue in the coalition next week.