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Investing.com -- Germany is set to undergo a substantial fiscal expansion in 2026, driven mainly by higher spending rather than tax cuts or investment increases.
Economists at Barclays project the general government deficit to widen to 4.1% of GDP next year, from 2.9% in 2025, with the primary deficit rising to 2.8% of GDP. Public debt is forecast to climb to 65.8% of GDP.
“The government is planning a large fiscal expansion in 2026, skewed towards spending increases, but more equally spread across spending items than in 2025,” a team led by Silvia Ardagna wrote.
They note that the fiscal impulse — the direct effect of policy on growth — will be significant. The government projects a fiscal expansion of 1.6 percentage points of GDP in 2026, while Barclays estimates a slightly smaller 1.2pp increase.
After a modest consolidation of 0.3pp in 2024, the expansion is expected to reach 0.5pp in 2025, accelerating strongly next year.
Most of the deficit increase in 2025 will come from social benefits, which are set to rise by 1.2 percentage points to 26.5% of GDP, while public investment is expected to increase by only 0.15 percentage points.
“This composition is not particularly growth friendly, as the fiscal multiplier for social spending is notably lower than that of public investment and of income and social security taxes,” the economists said.
In 2026, the fiscal expansion accelerates, with total spending increasing by 1.3 percentage points of GDP. Each major category — social spending, current expenditures, capital transfers, and public investment — is projected to rise by around 0.25 percentage points.
Defence spending will add €18 billion, taking total defence expenditure to 2% of GDP. Meanwhile, income tax revenue will fall by 0.25 percentage points due to new exemptions for retirees and slower growth in the tax base.
The government’s new €500 billion special investment fund, announced to finance projects between 2025 and 2037, will play a role but may not translate fully into additional capital formation.
Economists point out that the “projected increase in public investment falls notably short of the planned disbursements of the fund,” suggesting part of it will finance spending already budgeted.
They estimate that the fiscal expansion could lift GDP growth by about 0.8 percentage points based on government projections, or 0.6pp under Barclays’ own assumptions. However, the team cautions that broader economic headwinds could limit the impact.
“It is not assured that German growth will increase as much,” they said, citing external shocks such as tariffs, geopolitical tensions, and the costs of the climate transition.