Why Germany's new government is already facing a black hole in its budget

An official estimate showed that tax revenues will be some €81.2 billion lower between 2025 and 2029 than had been expected when the last forecast was published in October. Of this, there will be around €33 billion less in the federal government's budget alone. 

For the current year, things don't look so gloomy, with revenues of around €389 billion amounting to €600,000 less than expected. However, by 2026, the treasury will need to fill a gap of around €10.2 billion in the federal budget. 

This was in part due to recent tax relief measures, the finance ministry said. These were planned ahead of last autumn's estimates but came into force since then. 

The lower tax take could hit new Chancellor Friedrich Merz's plans to unleash a fiscal "bazooka" intended to lead to vast extra outlays on defence and infrastructure in the coming years.

On Thursday, Foreign Minister Johann Wadephul (CDU) told his NATO counterparts that Germany supported the US goal of lifting defence spending to five percent of GDP - a target that could cost the country more than €200 million per year. 

READ ALSO: Germany announces plan to meet Trump's NATO spending target

'Clear focus on growth'

Finance Minister Lars Klingbeil said the forecasts showed that "we must strengthen revenues through higher economic growth. This is the only way to gain new financial room to manoeuvre". 

The SPD co-leader also pointed to the government's plans to "modernise" Germany with new infrastructure and lower bureaucracy. 

Prominent industry federation BDI echoed the sentiment, calling for a "clear focus on economic growth".

READ ALSO: Merz vows to rev up German economic 'growth engine'

"The government should make structural reforms and a rapid budget process their top priority with the clear goal of promoting growth and competitiveness," said the group's director general Tanja Gönner.

Merz has promised a blitz of reforms to get Europe's top economy back on its feet after two years in recession, from slashing corporate taxes to cutting red tape.

The government faces myriad challenges however, from a manufacturing slump to weak export demand, all of which have prompted officials to slash their growth forecasts for this year to zero.

The centre-right CDU/CSU has also promised significant tax relief to voters, including annual cuts in corporation tax from 2028, lower energy tariffs, higher tax write-offs for commuters, and a review of income taxes for lower and middle earners. 

However, the parties have said their coalition plans are all subject to financing, meaning some proposals could be scrapped if the government can't find a way to boost its revenues. 

Debt brake reform 

One way to loosen up the government's tight financial constraints will be a planned reform of the debt brake. Known as the Schuldenbremse in German, this Merkel-era clause in the constitution caps borrowing at just 0.35 percent of GDP. 

Speaking in the Bundestag on Thursday, Klingbeil said he wanted to forge ahead with a reform of the rules as soon as possible. "I will soon appoint a commission of experts to develop proposals for this", the SPD politician revealed.

In the coalition agreement, the CDU/CSU and SPD agreed that "permanent additional investment in strengthening our country" should be made possible. Concrete plans for a reform should be drafted this year, and a law should also be passed before the end of the year, said Klingbeil.

To get a bill through parliament, however, the parties will have to achieve a two-thirds majority, which they do not have on their own. If they want to maintain their 'firewall' against the far-right AfD, they will have to get the votes of both the Greens and the Left Party. When it comes to latter, the CDU/CSU also traditionally maintain a ban on cooperation. 

Speaking in parliament on Thursday, the Left Party also made it clear that they would only agree to a "genuine reform" of the debt brake.

READ ALSO: What is Germany's debt brake and how does it affect residents?

"We need investments that reach tenants who are overrun by the next utility bill, care workers forced to manage an entire ward in pairs, single parents who are dependent on every cent," said party leader Ines Schwerdtner. That means the CDU/CSU will have to make concessions to their tight spending rules.  

Before entering government, the black-red coalition already passed two significant carve-outs to the debt brake: a €500 billion fund for infrastructure and an exemption for borrowing that's linked to defence spending.

READ ALSO: Germany has ditched the debt brake, but what will the consequences be?

With reporting by AFP and DPA