Economists warn of severe budget crisis in Germany starting in 2028

Germany is heading for a severe budget crisis, leading economists predicted.

"This budget policy cannot be sustained in the long term," Clemens Fuest, president of the ifo Institute in Munich told the Sunday edition of Die Welt newspaper.

The ruling coalition of Chancellor Friedrich Merz's conservative Christian Democratic Union (CDU), its Bavarian sister party, the Christian Social Union (CSU), and the Social Democrats (SPD) must name spending priorities for the 2028 federal budget, such as defence and infrastructure. 

"All other spending should be frozen or, if possible, cut," Fuest said. If the coalition is unwilling to do this, tax increases would be unavoidable.

The budget committee of the Bundestag, the lower house of parliament, approved a provisional 2027 federal budget in the early morning hours of Friday after nearly 16 hours of negotiations.

Spending in the core budget rises to a record €561 billion ($618 billion). Net borrowing climbs to almost €123 billion in the core budget alone. In addition, billions of euros in loans come from special funds. Overall, new debt totals around €210 billion.

Economists paint a bleak picture

Achim Wambach, president of the Leibniz Centre for European Economic Research (ZEW), sees the situation from 2028 as more serious than the economic recovery suggests. The interest rate is above the Germany's economic growth rate, which is why the state cannot grow out of its debt.

The top priority must be welfare reform, Wambach said. Spending must be urgently addressed. "Subsidies that do not promote growth must be cut," he said.

Jens Boysen-Hogrefe of the Kiel Institute for the World Economy paints a similarly bleak picture.

"Owing to economic fluctuations and special effects, there may be breathing spaces in individual years, but the trend is clearly negative," he said. This is because the population is ageing while interest payments are rising. "Additional levies are likely even with strong spending discipline."

Court of Audit president calls for bigger push to save

Ansgar Heveling, president of the Bundesrechnungshof, the federal audit court that scrutinizes federal financial management, is calling on the coalition to do significantly more on budget consolidation.

Commenting on next year's budget, he told the Rheinische Post that "overall, this is a situation that Germany can still bear, but not in the long term."

Every third euro the government spends is financed by borrowing, Heveling noted.  

"Anyone who can only afford a third of their spending on credit is clearly living beyond their means." The share of interest spending in the federal budget will double by 2030, the president warned.