Leading economic think tank, the German Institute for Economic Research (DIW), has voiced significant concerns regarding the German federal budget. President Marcel Fratzscher criticized what he described as a “massive deception” aimed at presenting a veneer of relief for citizens without delivering substantial benefits. He argued the current approach relies on short-term cuts to fill budgetary gaps rather than addressing fundamental issues.
Specific criticisms were directed at several policy decisions within the budget. The reduction in electricity tax, initially intended for businesses, has not been extended to households and planned improvements to parental benefits are not universally applicable, leaving many consumers unaffected. Errors have also been identified in the design of the climate bonus scheme.
A key area of concern centers on the reform of Germany’s debt brake. Fratzscher highlighted the risk posed by the lack of a spending cap for the federal armed forces (Bundeswehr). The failure to exclude investments in infrastructure and education from the debt brake is deemed problematic, as these are crucial for medium- and long-term economic growth. Conversely, while defense spending has been exempted, Fratzscher cautions that this will likely yield fewer growth impulses and limited additional tax revenue, potentially leading to a substantial increase in national debt.
Despite these concerns, Fratzscher shares the view of opposition leader Friedrich Merz regarding a potential economic recovery. He anticipates an economic rebound in the second half of the current year, accelerating further into the following year, predicting a growth rate of 1.7% after a projected 0.3% growth this year. This forecast, however, is contingent on the government’s commitment to implementing its planned investment package in its entirety.