Germany Plans Major Fiscal Expansion: Debt Brake Reform and €500B Investment Fund

Germany is moving forward with a historic fiscal package to expand public spending and reform its debt rules. The CDU/CSU and SPD have agreed on a multi-year financial framework, including increased investments in defense and infrastructure. To implement these changes, constitutional amendments are required, sparking political debates, particularly with the Green Party.

A key component of the package is revising the debt brake, a constitutional rule limiting deficits. The proposed reform excludes defense spending above 1% of GDP, potentially unlocking €400 billion (9.3% of GDP) over the next decade. While this move strengthens Germany’s military amid global tensions, the Greens advocate raising the exclusion threshold to 1.5% of GDP and expanding the definition to include cyber and energy security.

Beyond defense, a €500 billion (11.6% of GDP) special fund is set to modernize infrastructure, transport, housing, and decarbonization efforts over the next ten years. However, concerns exist over whether this investment is truly additional or merely reallocates existing budgetary resources.

The package requires a two-thirds majority in both the Bundestag and Bundesrat. Since the coalition lacks the votes in the new Bundestag, the government aims to pass the reforms before the next parliament convenes on March 25. Support from the FDP or Free Voters is essential for Bundesrat approval.

Economically, the increased spending could boost GDP growth by 0.8 percentage points in 2026. While Germany’s debt-to-GDP ratio could rise from 62.9% to 84%, expected economic growth may offset the increase. The European Commission’s ReArm Europe proposal could also allow defense spending exemptions, easing EU deficit constraints.