Looming Fiscal Crisis Forces Germany to Confront Tax Hikes and Structural Reforms
The German government faces a rapidly deteriorating fiscal situation, potentially leading to significant tax increases and a critical re-evaluation of long-term spending priorities, according to leading economists. Monika Schnitzer, Chair of the German Council of Economic Experts (Sachverständigenrat), delivered a stark warning in a recent interview, stating that the federal budget will be “unfunded” by 2029 at the latest.
Schnitzer’s assessment highlights the growing strain on public finances, exacerbated by aging demographics, rising healthcare costs and commitments to ambitious climate and energy transition goals. While the government has repeatedly emphasized reliance on robust economic growth to offset the looming deficit, Schnitzer deemed this strategy “unrealistic”. She questioned the feasibility of achieving the necessary growth rates to bridge the fiscal gap without substantial structural changes.
The Council’s Chair dismissed the notion that reforms within the crucial sectors of healthcare and pensions could meaningfully reduce overall expenditure. While acknowledging the potential to moderate cost increases through efficiency measures, she emphatically rejected any expectation of genuine cost savings. “Reforms in these areas are only sufficient to limit the rise in costs. They will not lead to lower overall expenses” Schnitzer stated, underlining the severity of the challenge.
The prospect of tax increases, long resisted by the governing coalition, now appears increasingly inevitable. Schnitzer explicitly cautioned taxpayers to brace for potential financial burdens, suggesting, “I’m curious to see whether the government cancels some of its new initiatives – or perhaps even raises taxes. I suspect that the government will eventually need to consider this”. This comment signals a hardening of the economic consensus, placing mounting pressure on policymakers to address the fiscal shortfall, even if it means reversing popular policies or implementing unpopular tax measures.
The situation is particularly sensitive given public discontent over already high tax burdens and the potential impact on economic competitiveness. The Council’s pronouncements are likely to reignite a debate about the long-term sustainability of Germany’s social welfare model and the government’s ability to balance fiscal responsibility with its social and political commitments. Further, the implicit criticism of current policy suggests a growing divergence between the Council’s expert advice and the government’s publicly presented strategy, raising questions about the transparency and effectiveness of current economic governance.