4. September 2025
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Papers
Zero fiscal space
2 min Lesezeit
Dr. Florian Schuster-Johnson, Philippa Sigl-Glöckner
The discretionary share of the federal budget is now only around 16 percent and could disappear altogether over the course of the next ten years. The main drivers are rising interest expenses and growing social transfers to support low-income households.
Blanket spending cuts will not solve this problem. Without fundamental reform, an excessively tight budget is looming. Financial leeway will then only be available through special funds, which must be approved by a two-thirds majority in both houses of Parliament each time.
Our recommendations for action:
- Reorient the federal budget towards the objective of high employment, incomes and sustainable growth by getting more people into well-paid jobs as well as making more companies profitable, which in turn reduces the need for subsidies
- Conduct rapid reviews of key spending areas to achieve this objective, covering innovation, the transfer and tax system, public services, and infrastructure development
- Reform the debt brake because even a reformed budget does not fit within the framework of today’s fiscal rule, which means that either Germany is governed in a permanent state of emergency or the debt brake is reformed
Why did we write this paper?
The Bundesrechnungshof (the supreme audit institution in Germany) estimates that the share of freely disposable expenditures in the federal budget is around ten percent. If that is true, it would be not only an economic and fiscal problem, but also a democratic one: future governments, legitimized through elections, would hardly have any room to maneuver in order to implement the programs for which they were elected. The federal budget would be far too constricted. That is why we wanted to take a closer look at how the budget might develop in the coming years – and how it could be set up sustainably in the long term.
What did we learn?
We have developed a new Fiscal Space Indicator (FS Indicator): the disposable share of the federal budget and how it is likely to develop in the future. The FS Indicator shows that today, disposable expenditures amount to just 16 percent and could completely disappear within ten years. The main drivers are rising interest expenditures – because the federal budget has to shoulder the financing costs of special funds and exemptions – as well as increasing social transfer needs, which we call “survival subsidies.” If the federal government wants to set up the budget sustainably in the long term, so that future democratic majorities once again have the necessary room to maneuver, it will need policies that bring more people into the labour market, as well as a fundamental reform of the budget and the debt brake. Otherwise, German fiscal policy risks sliding into American conditions: as with the debt ceiling in the U.S., every few years when the budget gets tight, a new special fund would be required.
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