German Economic Council Projects Deficit of Up to 4.8% of GDP by 2040 and Calls for Cuts

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The council of economic experts that advises Germany’s government warned that the country could face, by 2040, a gap of about 300 billion euros between revenues and spending, the equivalent of up to 4.8% of GDP. Without changes to fiscal policy, public debt would approach 100% of GDP, according to the council’s annual report, as reported by the German newspapers Frankfurter Allgemeine Zeitung, Handelsblatt and Süddeutsche Zeitung.

The 458-page document was delivered to Chancellor Friedrich Merz and Finance Minister Lars Klingbeil, according to the Spanish newspaper Cinco Días. The council’s chair, economist Monika Schnitzer, said difficult decisions will be unavoidable, the Swiss newspaper Neue Zürcher Zeitung reported.

The projected shortfall has three main drivers: loans for defense taken outside the debt brake, the constitutional rule that limits borrowing, and social spending and interest payments, according to Handelsblatt.

To close the gap, the five economists recommend cutting subsidies and tax breaks, ending retirement at 63, unifying social benefits, reducing personnel spending and limiting debt financing for defense, according to the Neue Zürcher Zeitung. Most members also accept raising taxes, such as the value-added tax and income tax, and propose a temporary defense levy. The position on taxes was not unanimous within the council.

The newspaper O País adds that the experts suggest allowing, starting in 2031, an additional structural deficit of 0.25 percentage points of GDP per year for defense, as a more sustainable way to finance rearmament.

Despite the warning, the report brings better news in the short term: the council raised its growth forecast for the German economy to 1.3% this year, up from 0.5% in its previous estimate. It would be the first expansion since 2022. For next year, the forecast is 1%.

The diagnosis comes as the coalition between the conservative Union and the Social Democrats (SPD) negotiates the federal budget for 2027. On the table are a tax on sugary drinks and the number of beneficiaries of housing allowance, the Süddeutsche Zeitung reported. Merz has promised to cut electricity tariffs to the minimum permitted under European Union rules, a measure that would cost about 5 billion euros per year. Social security contributions are also expected to rise.

Klingbeil defended the coalition, acknowledged that governing is difficult at this moment, and said the government wants to make 2027 the year of private investment. A study by the Kiel Institute, cited by the Süddeutsche Zeitung, estimates that Berlin will need to save or raise revenues equal to more than 0.5% of GDP per year.

For Brazil, the debate matters because Germany is Europe’s largest economy and a central market for Brazilian exporters. A severe fiscal tightening there would likely slow European growth and demand for Brazilian products.

Reporting from Frankfurter Allgemeine Zeitung (p. 1 e p. 17, Berlim), Handelsblatt (p. 1 e p. 21), Süddeutsche Zeitung (p. 15 e p. 16, Berlim), Neue Zürcher Zeitung (p. 25, Berlim; edição internacional, p. 17), Cinco Días (p. 21, Berlim), O País (p. 23, Berlim).