As the German government weighs the costs of increasing defense spending, a prominent economic expert suggests that the burden could be alleviated by limiting the rise of pensions and retirement benefits or by introducing a higher value-added tax. According to Clemens Fuest, the head of the Ifo Institute, “if it’s about achieving low growth losses, one would have to cut consumption-related expenses, for example, by limiting the rise of pensions and retirement benefits or by increasing the value-added tax.” Fuest made the statement to the Rheinische Post.
Ultimately, the decision on how to finance the expected higher expenses for the Bundeswehr will rest with the government. “If the government wants to tax high incomes, it should increase the income tax. Then the negative growth effects would be stronger” Fuest said, emphasizing the need for the government to take a clear stance.
Germany is currently only meeting the NATO’s two-percent defense spending target by using the Bundeswehr’s special fund, which is set to be exhausted by 2028. Moreover, an increase in the NATO target to three percent of the country’s economic output is being considered. This would result in a significant shortfall in the defense budget, with billions of euros at stake.