Thanks to the best quarter in three years, the German economy is heading into 2026 with tailwind. In the fourth quarter of 2025, gross domestic product (GDP) increased by 0.3 percent compared to the previous quarter, as confirmed by the Federal Statistical Office. However, the holes in the state budget last year were significantly larger than initially assumed.
Based on overall economic output, the federal, state, local and social security deficits were 2.7 percent, as in the previous year. On a preliminary basis, the Wiesbaden authorities had put the minus for 2025 at 2.4 percent. Germany nevertheless complied with the European debt rule, which allows a budget deficit of a maximum of three percent.
Even bigger budget holes expected
The Bundesbank expects the deficit ratio to increase to four and a half percent by 2027 because the state wants to invest huge sums of billions in roads, railways and defense financed by debt.
“Temporarily higher deficits are understandable in order to quickly overcome the challenges in defense and infrastructure,” writes the Bundesbank in its latest monthly report. However, it is important to use the additional billions precisely. In addition, there is a need for “a reliable perspective as to how the high deficits can be reduced,” the central bank appeals to the federal government.
The Bundesbank warns: “Without countermeasures from the federal government to comply with the debt brake, the deficit ratio would continue to rise towards five percent in 2028.” There is disagreement within the federal government about the future of the debt brake, which is to be reformed. While the SPD wants more scope for investments in infrastructure, daycare centers and schools, the Union rejects further easing of the debt brake.
Government spending grows faster than revenue
In 2025, the tax authorities spent 119.1 billion euros more than they received. The deficit was around four billion euros higher than the year before. Although social contributions and tax revenue increased significantly, overall government spending grew faster than revenue. Interest expenses in 2025 were also a good eight percent higher than a year before, and social benefits increased, especially for pensions and pensions, but also for health.
While the federal government’s financing deficit rose by almost 19 billion euros to 79.6 billion euros compared to the previous year, the states were able to more than halve their deficit to almost 10 billion euros.
Billions from the state as an economic driver
The billions in investments made possible by the easing of the debt brake are likely to stimulate the economy: Economists assume that the German economy will pick up speed from spring after a comparatively weak start to the new year.
After a long downturn, there are increasing signs of a trend reversal in the industry. The mood in the executive suites of German companies has recently brightened more than expected. When it comes to exports, Germany’s manufacturers are more confident again – despite the ongoing uncertainty about US President Donald Trump’s customs policy.
“Positive reports have dominated recently. Incoming orders, for example, have increased significantly. And important early economic indicators have also climbed,” summarizes the chief economist at Liechtenstein’s VP Bank, Thomas Gitzel. “It seems that the German economy is gaining momentum this year.”
Strong year-end spurt in 2025
According to statisticians, growth in the last three months of last year was primarily driven by increasing private and government consumer spending. Many consumers have more money in their pockets thanks to rising wages. But construction investments also increased significantly. Positive from the point of view of economists: More was also invested in equipment – i.e. machines, devices and vehicles – than in the previous quarter.
“The economically volatile year of 2025 ended with an increase in economic output,” said the President of the Federal Office, Ruth Brand. In 2025 as a whole, Germany narrowly missed its third year in a row without economic growth, with an increase of 0.2 percent.
