German cabinet approves 2026 budget amid warnings of a massive funding gap

The German cabinet approved the 2026 draft budget on Wednesday but did not provide an explanation on how the government will close major gaps in its financial planning for the coming years.

Germany’s ruling parties had relaxed the country’s strict debt rules earlier this year, allowing the coalition to take on more debt for additional defense spending and infrastructure investments.

German Finance Minister Lars Klingbeil, a member of the Social Democratic Party (SPD), praised the planned “record investment” of 126.7 billion euros for 2026, including funds for infrastructure and the green transformation of the economy.

Within this scope, defense spending will also increase by a third to 82.7 billion euros.

Germany’s constitutional borrowing limit, the “debt brake,” had long hindered investments aimed at strengthening the country’s neglected defense infrastructure and outdated bridges and roads.

Disagreements over how to align policy goals with fiscal constraints had caused the collapse of the previous coalition government.

According to the 2025 draft budget and long-term planning presented by Klingbeil in June, Germany’s borrowing over the next few years is projected to reach up to 850 billion euros.

However, it has recently emerged that this situation still leaves a budget deficit of about 30 billion euros more than expected, which is set to reach 172 billion euros by 2029.

The new figures are partly due to recent government decisions that introduced new compensation commitments to states and municipalities, which will lose revenue due to pension subsidies and planned growth-support measures.

As additional growth is unlikely to close this gap, it remains unclear how the deficit will be covered. The government currently aims to increase annual potential growth to over 1% by 2029.

Klingbeil said that a series of measures, including further cuts, would be necessary to close the deficit, which is expected to exceed 30 billion euros in 2027.

“This will be one of the biggest domestic challenges we have to overcome in the next 12 months. Everyone at the cabinet table will have to make savings. The finance minister’s popularity within the cabinet is unlikely to increase,” Klingbeil told reporters.

The minister also said that Germany plans to reform structures like its “bloated” social security systems and has established several expert commissions for this purpose.

Critics have long been urging Germany to undertake deeper structural reforms to balance its budget.

Veronika Grimm, a fiscally conservative economist who advises the German economy ministry led by the Christian Democrats (CDU), said, “Instead of reforming the debt brake, we urgently need structural reforms to reduce the financing gap.”