Germany’s 2025 Federal Budget Is a Disaster

For German Finance Minister Christian Lindner of the Free Democrats (FDP), the federal government’s 2025 draft budget is a success: Germany’s debt brake remains in place despite mounting criticism, companies and high earners receive tax breaks, spending is “prioritized” for various specific areas, and to top it all, the country can — purportedly — expect to see record investment.

About 488 billion euro have been allocated for the 2025 federal budget — on paper, not much less than for 2024. But what is important is how this money will be used. Next year, more money will be spent on the military and national security, on tax relief for corporations, and on the national rail company, Deutsche Bahn.

On the other hand, there will be many budgetary cuts both large and small: to foreign aid and humanitarian assistance, to federal subsidies for statutory insurance funds, to Bürgergeld (the system of universal credit for welfare recipients), to jobseekers’ services, to the Federal Volunteers Service, and to grants for welfare groups and the independent cultural scene, to name just a few.

The Dictates of the Debt Brake

Why? Because the budget is once again subject to the dictates of the debt brake. Although a large segment of the Social Democratic Party (SPD) group in parliament was keen to declare another emergency in order to suspend the debt brake, this request got nowhere, as Chancellor Olaf Scholz as well as Vice Chancellor Robert Habeck were unwilling to risk a break with the FDP.

Instead, the governing coalition plans to use several other adjustment mechanisms. Interest rates for federal bonds are to be entered differently in the books, freeing up around 7 billion euro in the budget. There will also be a change to the way that the debt ceiling is calculated during economic upswings and downturns (the debt brake’s so-called “cyclical component”). This provides an extra 3.4 billion euro of budgetary wiggle room. Then, instead of subsidies, Deutsche Bahn will receive a loan of 5.9 billion euro, which counts as a “financial transaction”, rather than additional debt, under the regulations governing the debt brake.

The governing coalition has little to offer in terms of social policy or measures to relieve financial pressures.

In addition, the government has plans for a high “overall budget reduction” of 12 billion euro — these 12 billion euros are formally planned into the budget, but are to be left unspent in order to honour the traffic-light coalition’s budget compromise. Otherwise, a "growth initiative" is supposed to boost the economy and ensure additional GDP growth of around 0.5 percent. To many economists, however, this forecast looks murky.

Lindner Played His Cards Well

It is clear to anyone following the budget discussions that Finance Minister Lindner has played his cards well. After refusing to follow the advice of various experts (such as the advisory councils to the Federal Finance Ministry and the German Central Bank) in setting interest rates and the cyclical component, he has finally acted on these issues in order to avoid the growing pressure to once again suspend the debt brake.

While the brakes are still on for investment, the governing coalition is tirelessly repeating the assertion that the coming fiscal year will see investment hit “record levels”. At first glance, this checks out: investment is supposed to increase to around 81 billion euro, from around 71 billion in the current fiscal year. Yet this is still miles away from addressing the existing investment backlog.

For years, Germany has placed last among its European neighbours in terms of public investment at the federal, state, and local levels. While just under 3 percent of gross domestic product is invested back into the domestic economy, the majority of European countries spend over 4 percent, quite a few spend 5 percent, and a few spend an even greater percentage of their GDP on such investment.

As if that were not bad enough, the small spike in spending intended for 2025 will only be short-lived: the governing coalition’s fiscal plans involve a continued dip in spending between 2026 and 2028 (a total reduction of 6.6 billion euro). There is also expected to be a further fall in new borrowing. That is in sharp contrast to the 60 billion euro in additional investment which are necessary each year to meet the demands of the changing economy, according to economists affiliated to industry and trade unions.

In a paper for the Budget Committee that is pending publication, the Ministry of Finance presents these budgetary policy decisions as “continuing to normalize fiscal policy” and stresses that they will secure the state’s financial stability, “so as to be able to provide comprehensive stability and relief during exceptional crises”. And the multiple crises of our times, which we have long been embroiled in? In the ministry’s eyes, they apparently do not exist.

The FDP has also done well for itself in terms of the areas where investment will be made. For example, 12.4 of the 81 billion euro in investment is earmarked solely for the “generation capital” project pushed primarily by the FDP. The project intends to build up a fund that will be backed by the market, and from which statutory pension funds will be subsidized in the distant future.

Meanwhile, this budget seems to have finally scuttled the guaranteed basic child allowance — an urgently needed social policy tool that could raise 440,000 children out of poverty. This project is near and dear to the Greens, who continue to maintain that the policy is not dead in the water. Yet time has run out to implement the complex project prior to the next federal elections — due partly to the finance minister’s refusal to budge, and partly to technical weaknesses of the present draft.

The governing coalition has little to offer in terms of social policy or measures to relieve financial pressures, either. Quite the contrary: the “climate money” promised in the coalition agreement, meant to offset rising CO2 prices, is also done for, and Labour Minister Hubertus Heil recently announced that 2025 will see no increase in Bürgergeld benefit payments, which had already been purposefully kept low. The justification? Well, after all, the inflation rate recently fell more sharply than previously presumed.

And what about the increased poverty levels due to fallout from the COVID-19 pandemic and the energy crisis? What about inflation in general? The traffic-light coalition seems to think all of this has already been dealt with.

Slashing Social Spending

Hardly discussed but equally alarming is the German government’s curtailing of subsidies to statutory insurance funds. The statutory pension fund, for example, is to receive 1 billion euro less in 2025 — despite what had been pledged. This would be the fourth cutback in a row, amounting to a reduction of almost 9 billion euro between 2022 and 2027. The German Pension Insurance fund has criticized the cuts, which will reduce the fund’s financial reserves and make earlier contribution rate increases more likely (and in the process fuelling free-market calls for raising the retirement age).

Funding for statutory nursing care will also be cut by 1 billion euro, despite increasing need and the astronomically high sums that care recipients or their families are now paying for a place in a nursing home. While the health insurance fund is not facing any cuts in its subsidy, it is not receiving any increase either.

Yet the fund’s financial situation is continuously worsening — by the end of the year, it is expected to have a deficit of over 4 billion euro. Health Minister Karl Lauterbach has already announced that personal contributions will increase in 2025, for nursing-care contributions as well. Due to the dictates of the debt brake and the continued blocking of a wealth tax, the governing coalition is once again shifting part of the financial burden onto the insured.

Other areas that are important to much of the population are also looking bleak. In the face of the ever-worsening housing crisis, the governing coalition is indeed increasing the budget for social housing — by about 1 billion euro from 2023 to 2025 — but this is far from sufficient. Although the government has pledged to build 100,000 new subsidized apartments each year, recent years have averaged only around 23,000. At the same time, more and more housing which was previously subsidized is going over to the private sector. One result of this is that the number of unhoused people registered in shelters has more than doubled since 2022, from 178,000 in 2022 to about 440,000 by the end of January 2024.

Given the ongoing biodiversity crisis, the paltry sums made available to the Ministry for the Environment are extremely sobering.

Even for people with more money, for whom the governing coalition supposedly wants to make the path to homeownership easier, there is ultimately little money in the budget. Subsidy programmes designed to help young families buy old buildings or promote climate-friendly construction in low-cost housing come with an array of restrictive requirements and excessive personal financial contributions, which are presumably necessary to ensure that few people are able to make use of the programmes.

Instead, large amounts of money are pocketed by landlords thanks to the recently reformed rent subsidy available to low-income households, as well as housing-related costs paid out of the public purse. The German National Tenants' Association calculated that in 2023, these kinds of direct benefits, totalling roughly 20 billion euro per year, gobbled up six times more money than the 3.15 billion earmarked for social housing in the current fiscal year.

Beyond these budget issues, the FDP-led Ministry of Justice opposes extending the rent control law, and is working hard to water down existing regulations. In their belief in the free market and their objection to regulatory interventions which benefit the majority, the FDP find themselves in lockstep with Minister for Housing, Urban Development, and Construction Klara Geywitz of the SPD. Asked about whether cities should not litigate against inflated rents in future, given that a study showed only 2.4 percent of all tenants do so on their own behalf using the rent brake, Geywitz answered, “we don’t have a ‘nanny-state babysitter’ that interferes in contractual relationships between two private parties”.

The Ongoing Crisis in Education

The 2025 budget will also do little to ease the burden of another area that negatively affects the daily lives of many: there is no sign that investment in education is a priority, despite the repeated assurances of the traffic-light coalition. While it is true that the budget of the Ministry of Education and Research (BMBF) is formally set to increase by about 833 million euro to 22.3 billion, but about 800 million is to be left unspent by the ministry. The figure is priced in as part of the overall budget reduction, meaning money the coalition is already banking on not spending — otherwise, their entire budget compromise will fall apart.

As reported by the Education and Science Workers’ Union, Lindner apparently took 1.3 billion euro that were left over from a previous government-funded digitalization initiative after being earmarked as special funds, and summarily tossed them into the BMBF’s budget. In other words, what we are talking about is not more money in practice, but rather funds being reallocated in an opaque fashion.

All the while, there is the absurd promotion of certain flagship projects. Finance Minister Lindner never tires of underscoring, for example, that 1 billion euro are to be allocated to the Head Start Programme next year. The programme temporarily makes additional funds available to schools in underprivileged neighbourhoods — provided the states co-finance the project. But in any case, the programme is at best a drop in the ocean — no more than 4,000 of the country’s 30,000 schools will benefit from it, and it cannot be anywhere near what a reasonable, guaranteed basic child allowance for every single child in poverty would have accomplished.

All in all, despite the 2 billion euro allocated to extending the Day-care Quality Act for 2025, which should at least be briefly mentioned here, the section of the budget dedicated to education as a public service will once again be criminally neglected. At the municipal level alone, the investment backlog in schools and day-care centres now amounts to around 67 billion euro.

Budgeting for a Shortfall in Climate Investment

Even investment in decarbonization and addressing the climate crisis will not be enough to meet society’s challenges. The Climate and Transformation Fund (KTF), the government’s most important funding mechanism for this, is supposed to receive 34.5 billion euro for various projects in the next year. As the government is shifting the financing of the multi-billion-euro Renewable Energy Sources Act (EEG) surcharge from the KTF to the core budget, funding for energy efficiency in buildings and the installation of heat pumps will now be the largest item in the KTF budget, at 14.35 billion euro.

Funding for climate-friendly transport (3.4 billion), building the hydrogen economy (2.6 billion), and the transformation of industry (1.5 billion) are also supposed to be financed through the KTF. A total of more than 8 billion euro on top of that is available for direct industry subsidies: about 5 billion for new memory chip factories in East Germany and another 3.3 billion in relief to energy-intensive businesses.

The 2025 federal budget is tighter than ever, in many cases blocking investment in the adequate provision of public services and therefore also posing a barrier to many people achieving a better quality of life.

Yet funding for the KTF is on shaky ground. On the one hand, critics say that the coalition is counting on higher returns from emissions trading and carbon pricing (which provide a substantial amount of the KTF’s funding) than can reasonably be expected. On the other hand, 9 of the 12 billion euro in the aforementioned overall budget reduction, which the coalition is counting on, have been allocated to the KTF. Thus, while the government continues to uphold billions of euro in subsidies for industries which are damaging to the climate, the funds for climate action are to be left unspent if at all possible.

Given the ongoing biodiversity crisis, the paltry sums made available to the Ministry for the Environment are extremely sobering. Of the Ministry’s total budget of 2.6 billion euro, 1.4 billion go exclusively to the search for deep geological repositories for nuclear waste. In contrast, the 14 million (!) euro for the Species Recovery Programme, 48 million for the National Strategy on Biological Diversity, and barely 39 million for adapting to climate change appear laughable.

Trashing Transportation

It may be a comfort to know that Deutsche Bahn is set to receive 5.9 billion additional euro in investment. Yet the transport budget trails far behind what is required for a transition to environmentally friendly transit. Billions of euro are to be spent on new autobahn and expressway projects, for example, some of which were planned more than ten years ago — rather than this money going exclusively to maintaining and renovating Germany’s dilapidated road infrastructure.

The budget for expanding bicycle and pedestrian infrastructure, about 252 million euro, is also far from satisfactory: 754 million were allocated in 2022, and unions and the state transport ministers say they need 1 billion. The additional billions for Deutsche Bahn may look good on paper, but are far from enough to address the investment backlog.

While Germany invested 115 euro in its rail infrastructure per capita in 2023, other European countries far outstrip this (take Sweden at 277 euros per capita, Austria at 336 euro, Switzerland at 477 euro, and Luxembourg at 512 euro). On top of that, the aforementioned 5.9 billion that the government plans to loan Deutsche Bahn show what an utter mess the debt brake is.

In order for this money to be counted as a “financial transaction” and thus neutral in terms of the debt brake, Deutsche Bahn must pay the federal government interest on the loan with a high return on equity. The upshot is that DB InfraGo AG, the public-interest subsidiary of Deutsche Bahn that is to receive the loan, will be forced once again to significantly raise track access charges in order to generate the necessary return on equity. The foreseeable consequence of this is a drastic price increase not only for long-distance and regional train travel, but also for freight traffic — defeating the whole point, which was to get more traffic off the streets and onto the railway tracks.

Punching Down in the Name of Growth

Taken as a whole, the 2025 federal budget is tighter than ever, in many cases blocking investment in the adequate provision of public services and therefore also posing a barrier to many people achieving a better quality of life. That not only applies for the situation domestically, but also for the Global South. Funding for the Foreign Office and the Ministry for Economic Cooperation and Development, which channel money towards humanitarian assistance and cooperative development projects, will be cut considerably, and not for the first time during the traffic-light coalition’s time in office.

The coalition’s stated goal of increasing funding for foreign aid in line with defence expenditures has long been jettisoned since Russia began its war against Ukraine. Instead, given heightening geopolitical rivalries, crises, and wars, as well as growing political divisions at home, the government prefers to bank on expanding military and domestic security. The 2025 budget envisages a billion-euro increase to Germany’s Criminal Police Office and the federal police, and Defence Minister Boris Pistorius will get an extra 1.25 billion for defence spending, in addition to the 100 billion in funding set aside as special funds for the armed forces.

Meanwhile, the coalition is investing its hopes in a growth initiative that encompasses a variety of measures, including extending tax write-offs for companies and further reducing bracket creep. Experience has shown that such policies primarily benefit the highest earners, while painfully limiting the tax revenues of already cash-stripped local authorities. The government is also betting on various incentives to get people to work longer: overtime on top of full-time work will get preferential tax treatment, and stronger financial incentives will be implemented to encourage people to work past the retirement age.

We will continue to see massive attacks on the most vulnerable in German society in terms of budget policy and the pervasive backlog on investment.

Those already out of work, however, will get the stick rather than the carrot. Penalties and “reasonableness” rules for collecting Bürgergeld will be tightened, such that three hours of travel time will now be considered “reasonable” for those working six hours per day. All in all, the government is hoping to save the utopian sum of 5.5 billion euro on Bürgergeld, mostly in terms of benefit payments, but also through the budget for job placement. Preliminary estimates would suggest that job centres are lacking around 1.25 billion euro of the money needed for this task. If one also adds the fact that funding for integration courses for refugees will be halved (down to a total of half-a-billion euro), it becomes plain that the coalition’s policies to combat the shortage of skilled workers are, to put it mildly, riddled with contradictions.

There are therefore doubts as to whether or to what extent all these budget calculations and future projections are realistic. Given the consistently poor economic forecasts and the effects of the debt brake exacerbating the sluggish economy, the government’s budget says more about wishful thinking than it does about reality.

They are also kicking the can down the road — in the 2025 budget, the coalition plans to use up nearly all federal reserves (which still totalled around 37 billion euro in 2023), and has no answer to the question of how they will deal with the massive budget deficits that will emerge by 2028 at the latest. By then, the German Army’s special funds will have been used up, and Chancellor Olaf Scholz has already announced that the 2-percent NATO target will then be taken out of the core budget. The defence budget, which currently stands at around 53 billion euro, would then be augmented by about 40 billion in one fell swoop.

Due to the dictates of the debt brake and the ongoing desire to spare the country's rich and super-rich in terms of tax policy, it remains to be seen whether the debt brake will be overhauled by the next government, which will presumably be helmed by the Christian Democrats. For now, however, we will continue to see massive attacks on the most vulnerable in German society — those with little to no lobbying power — in terms of budget policy and the pervasive backlog on investment.

With this in mind, and taking into account 2024’s budget cuts, one might come to the cynical conclusion that “Agrardiesel-gate”, a scandal prompted by the proposed abolition of agricultural diesel subsidies, and the powerful protests by the influential agricultural lobby, resulted in the following takeaway from the coalition: you can only punch downwards. The greatest proponent of this would be the finance minister, who never lets an opportunity pass to spread inflammatory rhetoric about Bürgergeld recipients and especially refugees, playing straight into the hands of the extreme right.

Lindner will therefore be most satisfied with the hard-won budget compromise. But those who had hoped for more in light of Germany’s crumbling infrastructure, a staffing shortage in public services, the housing crisis, the climate crisis, or just the crisis in their own wallet, may find the government’s budget plans leave a sour taste in the mouth.

Translated by Anna Dinwoodie and Rowan Coupland for Gegensatz Translation Collective.