Germany appears poised to embrace a bold fiscal expansion in 2026, casting aside any notions of modesty. Instead of relying on tax cuts or investments, the country’s government plans to drive growth primarily through a significant increase in spending. Analysts at Barclays estimate that the budget deficit will rise to 4.1% of GDP, while public debt climbs to 65.8%.
Economists at Barclays, led by Silvia Ardanuy, assert that this expansion will be substantial. The government projects an impact of 1.6 percentage points on GDP, while Barclays estimates a somewhat more conservative impact of 1.2 percentage points. Either way, the momentum promises to be considerable.
Following a brief interlude focused on “budget discipline” in 2024, Germany is ready to reopen the fiscal spigot. The fiscal policy will ease by 0.5 percentage points in 2025, with a significant softening anticipated for 2026.
A considerable portion of the spending increase will be allocated to social benefits, which are set to rise to 26.5% of GDP. In contrast, government investment will see only a modest uptick of 0.15 percentage points. In other words, while spending will increase, its effectiveness may be called into question.
Barclays notes that such a spending structure “is not particularly growth-friendly,” since social benefits typically yield lower returns compared to investments. In short, Germany has chosen comfort over development to address its economic woes.
Total expenditures are expected to continue their upward trajectory by 2026, contributing an additional 1.3 percentage points to GDP. These increases are expected to be spread evenly across various categories, including social spending, current costs, capital transfers, and defense. The latter is set to receive an extra €18 billion, raising its share to 2% of GDP.
At the same time, income tax rates are likely to see a slight reduction, largely due to benefits for retirees.
A noteworthy component of this fiscal strategy is a special investment fund of €500 billion, designed to run until 2037. Although the fund is intended to finance “future projects,” analysts are skeptical, suggesting that some of the funds may simply cover existing budgetary gaps.
In theory, this fiscal expansion could add approximately 0.6 to 0.8 percentage points to GDP. In practice, however, outcomes are contingent on external factors such as tariffs, geopolitical dynamics, or another winter without gas supplies.
As analysts rightly caution, there is no guarantee that the German economy will grow by that much. One thing is certain, though: the government will spend every last cent.
