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

Germany is set to raise its borrowing by more than €210 billion ($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. Parliament's budget committee agreed the package in the early hours of Friday morning, lawmakers said, after weeks of haggling ‌between coalition partners that saw plans for taxes on plastics and sweetened drinks as well as cuts to social security dropped or delayed. The budget, which proposes spending of €561 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 defence 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 welfare 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 budget, with no major cuts to welfare spending and the overall tax burden, reflected the problems reaching agreement between the coalition partners.

"From an economic perspective, you would have hoped for a more ambitious budget with some cuts to welfare spending and some tax cuts," he said. Total new borrowing reached €210.4 billion, just under the record €215.4 billion recorded in 2021 during the COVID-19 pandemic, the ⁠figures showed.

That ​included new borrowing of some €123 billion from the core budget, which ⁠does not include additional borrowing authorised under special measures to allow greater spending on infrastructure and defence 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 defence, military defence and investment in ⁠transport and research, on the one hand, are complemented by a strong welfare state."

SOCIAL COHESION 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 defence and retirement benefits ​to get runaway deficits under control.

"It's true that many of the spending cuts proposed by the Council of Economic Experts would not take effect until 2028 or later, and would therefore have no impact ⁠on the 2027 budget, but there are still plenty of opportunities for savings," said Cyrus de la Rubia, chief economist at Hamburg Commercial Bank. "More importantly, however, structural savings must be made that will have a long-term impact," he said.

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.

However, opposition parties accused the government of "brazen tricks" to conceal borrowing and spending on basic income support. Late on Wednesday, officials in the coalition agreed to scrap a proposed tax on plastic ⁠packaging materials that had been agreed by cabinet in July, and to delay a tax on sugared drinks until 2028. They also agreed to roll 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 also delayed after the committee failed to reach agreement on €5 billion in financing measures to pay for it. However, Merz said the issue was not finally settled and he expected more discussion in the coalition next week.

"I remain committed to my aim of reducing the electricity tax to the European minimum, with the ‌reduction taking full effect from next year," ‌he told reporters in Dublin, where he was attending a European Union summit meeting.