Germany’s parliament has approved the country’s first annual budget since fiscal rules were loosened earlier this year, clearing the way for record public investments while committing to an expanded defence expenditure.
A Paradigm Shift in Fiscal Policy
On Thursday, the Bundestag gave its backing to the €591 billion spending plan for 2025. The budget provides for nearly €116 billion in total investment, financed largely through a new €500-billion infrastructure fund and an exemption from debt restrictions for defence.
Finance Minister Lars Klingbeil described the move as “a huge paradigm shift in German fiscal policy,” noting that Berlin has abandoned decades of fiscal restraint in favour of growth-driven spending.
Reviving Growth and Reinforcing Security
Germany, long a symbol of budgetary conservatism, is now banking on large-scale public investment to stimulate its faltering economy. A major portion of the plan also strengthens defence outlays, seen as critical for sustaining support to Ukraine and for meeting NATO commitments.
NATO leaders agreed in June 2025 to raise the alliance’s defence spending target from 2% to 3.5% of GDP, under pressure from the United States following Russia’s invasion of Ukraine. Germany’s latest budget raises military expenditure to 2.4% of GDP — an increase, but still short of the new benchmark.
Budget Framework and Special Funds
The 2025 budget’s core spending is set at €502.5 billion. Adding allocations from the special infrastructure fund and a €100-billion defence fund created by former chancellor Olaf Scholz in 2022, the package totals €591 billion.
The finance ministry said borrowing will amount to €81.8 billion under the core budget, with total debt issuance reaching €143.2 billion once special funds are included.
Political Challenges Ahead
The new budget comes after months of delay, following the collapse of the previous coalition government in November 2024. Germany had been operating on a provisional budget throughout this year.
With the 2025 plan now secured, Chancellor Friedrich Merz’s coalition faces tough negotiations over future spending. His conservative bloc has pressed for welfare cuts, drawing resistance from Social Democrat partners. Current projections show a €30-billion gap in the 2027 financial framework.
“We will have to deal with huge challenges there,” Finance Minister Klingbeil told lawmakers, while expressing confidence that compromises will be reached.
Next Steps
Parliament will begin debate on the draft 2026 budget next week, with final approval targeted for November. The discussions are expected to be contentious as Germany balances its push for economic revival with fiscal discipline and rising defence commitments.
