Spending Is Rising, Tax Revenue Is Falling

A significant increase in planned spending is projected: A total of approximately 555 billion euros (of which about 110 billion is for defense and 42 billion for interest payments) is expected to be spent. This represents a 5.9 percent increase compared to last year—even though spending was actually supposed to decrease by 2.5 percent.

At the same time, the latest tax estimate from May 2026 projects a smaller increase in tax revenue—all three levels of government must expect tax revenue to grow at a slower rate in the coming years than was anticipated in October 2025. By 2030, the tax shortfalls for the federal government as a whole will total 87.5 billion euros. The declining revenues are primarily attributable to lower growth expectations due to the Iran crisis.

Federal spending is thus growing faster than revenue—according to the Federal Audit Office, when special funds are included, the volume of spending rose by 75 percent from 2019 to 2026, reaching a total of 633 billion euros in 2027. Revenues, however, grew by only about 20 percent over the same period. The existing large budget shortfalls—totaling over 100 billion euros by 2030—present an additional major challenge.

It should be emphasized that investment levels remain high. A total of nearly 118 billion euros in investment funds will be available in 2027, both in the core budget and in the special funds. These funds are being directed toward transportation infrastructure, digitalization and climate protection, schools, kindergartens, housing construction, and modern hospitals. It is particularly important here that planning and approval procedures continue to be accelerated and that there is planning certainty regarding capacity expansion for businesses, in order to ensure the effective use of investment funds.

Budgetary leeway is shrinking

Net borrowing has also been significantly increased. The federal government plans for net borrowing of nearly 119 billion euros in the core budget for 2027 (of which 85 billion euros alone is for the sectoral exemption for defense spending). Compared to the last financial plan, NKA will rise by a total of approximately 50 billion euros by 2029. When special funds for the Bundeswehr and infrastructure are added, borrowing totals nearly 200 billion euros per year—for a total of over 1 trillion euros in net borrowing from 2026 to 2030.

This means that in the core budget and in the major special funds, nearly one in every three euros is financed by borrowing. Looking ahead, less and less borrowing will be available for areas other than defense. The fiscal leeway in the core budget will thus shrink over time. In 2030, interest payments are projected to reach approximately 80 billion euros—twice as high as they are today. According to the Federal Audit Office, defense and interest payments—together with pension insurance benefits—already account for approximately 48 percent of the core budget’s expenditures and will rise to approximately 67 percent by 2029, thereby tying up a large portion of spending in areas that do not primarily stimulate growth. As a result, according to the IW Cologne, the interest-and-tax ratio will rise from 7.7 percent in 2025 to 18.1 percent in 2030 —just under one in five euros of tax revenue, or one in eight euros of the federal budget, will then be tied up in interest payments and will no longer be available for measures that promote growth.

Next Steps

On April 29, the German federal government adopted its key parameters for the 2027 federal budget and financial planning through 2030. These key parameters marked the start of the budget formulation process. This procedure had been suspended for the 2024 and 2025 budgets. On July 6, 2026, the government’s draft budget was adopted. The first reading in the Bundestag is scheduled for the week of September 7–11, with the second and third readings taking place the week of November 23–27. The final vote in the Bundesrat is scheduled for December 18.