The potential economic impact of the reform of Germany’s fiscal framework

In March 2025, Germany adopted a constitutional reform of its national fiscal framework, with three major novelties. First, a new infrastructure fund, worth EUR 500 billion (11.6% of 2024 GDP), was set up outside the scope of the ‘debt brake’[1]. The fund is intended to finance new projects in the fields of transport, healthcare, energy, education, research and digitalisation. Projects financed by the fund can be approved within 12 years. Second, defence spending above 1% of GDP is excluded from the calculation of the ‘debt brake’. Third, the Länder are allowed to take up new net borrowing of up to 0.35% of GDP annually, as was the case at the federal level. This eases the previous requirement of the Länder to run balanced budgets.

The aim of the new infrastructure fund is to address Germany’s large investment needs, and as such it has the potential to significantly boost economic growth over the next decade. At the cut-off date of this forecast, plans for increased spending from the infrastructure fund and for defence based on the adopted reform were not deemed sufficiently detailed to be included in the baseline projections. In particular, they had not yet been formalised in a supplementary budget. The baseline forecast presented in this publication is therefore complemented by stylised model simulations, based on the QUEST model, to assess the potential economic impact of the reform. 

Assuming that the infrastructure fund is fully debt-financed and allocated to productive projects, and factoring in a linear spending profile starting in the second half of 2025, the model simulations show that compared to the baseline, Germany’s GDP would be around 1¼% higher by the end of this legislative term (2029) and 2½% higher by 2035 thanks to the fund’s investments. This reflects a long-lasting expansion of economic activity driven by an increase in capital stock and productivity. The impact on public debt would be relatively contained, provided the investment yields high productivity gains and boosts growth, with public spending rising below GDP growth.[2] The debt-to-GDP ratio would be around ½ percentage point higher in 2029, rising to 3¼ percentage points above baseline in 2035.[3]  The increase in investment would also have positive economic spillovers to other EU Member States: EU GDP would be lifted by ¾% in 2035, with around one-third of this impact due to spillovers.

The growth benefits of focusing on productive investments can be further illustrated by comparing the above results with an alternative scenario, in which half of the additional spending from the fund would finance (unproductive) public consumption. In this case, the impact on German GDP would be significantly smaller, amounting to ¾% of GDP in 2029 and 1¼% of GDP in 2035. This more muted impact reflects a smaller increase in overall production capacity, with knock-on effects on private demand. The debt-to-GDP ratio would be around 1½ percentage points higher in 2029 and 5½ percentage points higher in 2035 than in the baseline. 

As long as the emphasis on productive use is maintained, a speedy fruition of the fund would yield the most economic gains. This however requires addressing other investment bottlenecks than just financing, such as those related to labour supply, the efficiency of planning and permitting procedures, institutional complexity and administrative capacity.

As to the new possibility for the Länder to increase their deficit and for Germany to increase defence spending outside the scope of the debt brake, their impact on economic growth may be smaller, as there is no requirement to spend these two new sources of fiscal space on productive investment.