Germany is grappling with a significant budget deficit that has prompted the federal government to consider tough social reforms and sweeping economic strategies. Central to these efforts is the need for drastic savings, especially in labor and social affairs, which account for the largest portion of the national budget. The country faces a high debt ratio, currently at 64% of its gross domestic product, necessitating urgent fiscal reforms.
Finance Minister Lars Klingbeil has presented the 2026 budget, which is challenged by a substantial financial shortfall. To bridge this gap, the government plans to increase expenditures significantly, focusing on infrastructure and climate neutrality. This includes a notable investment in transportation, with 21 billion euros earmarked for new railways and advanced technology. However, to achieve savings, development aid will see a reduction of 300 million euros.
The financial strain extends to local municipalities, which have recorded a record deficit of nearly 25 billion euros in 2024. The Bertelsmann Foundation attributes this primarily to high inflation and a sluggish economy. Personnel and social expenses have doubled over the past decade, while tax revenues have stagnated. To manage these challenges, the foundation advocates for comprehensive state reforms.
The Merz government plans to incur substantial debt in 2026, amounting to 174.3 billion euros, which has drawn criticism for its potential burden on taxpayers and future generations. Critics argue for fiscal discipline and caution against excessive borrowing. Meanwhile, despite a 5% increase in revenue, municipalities continue to accrue debt due to rising social and energy costs, highlighting the need for long-term structural reforms to ensure financial sustainability.
