On June 24th Germany's federal cabinet approved Finance Minister Lars Klingbeil's budget plans for this 2025 and the following year. According to information from the German Press Agency, the draft budget for 2025 and key figures for 2026 have been approved.
It comes just months after Germany’s traffic light coalition collapsed over a dispute about the federal budget.
But on Tuesday, the Black / Red coalition approved a very similar budget, made possible because of the relaxation of Germany’s debt brake and the creation of a €500 billion special fund for infrastructure renovation.
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Klingbeil's budget for this year includes expenditures of €503 billion. Some €81.8 billion are to be financed from loans in the core budget, with more than €60 billion coming from debt-financed special funds.
Despite doubling debt in comparison with last year, Finance Minister Lars Klingbeil (SPD) has made it clear there will be little room for new social projects or measures to ease people’s everyday lives.
Indeed, most departments will have to make savings which may have a negative impact on social services and support programs.
So what does this mean for foreign residents in Germany?
Housing and rent
The draft budget for 2025 allocates €20 billion to housing, urban development and construction (through to 2028), with a record €3.5 billion earmarked for social housing. The stated aim is to create more affordable and climate-friendly housing.
Germany’s housing allowance (Wohngeld) will be increased by 15 percent in 2025 to offset rising prices. Estimates suggest the rise will benefit around 4.5 million people in two million low-income households.
Social benefits and pensions
At just under €180 billion, labour and social affairs remain the largest single item of expenditure in the budget. Pension insurance benefits will continue to rise, as will the “mothers' pension” (Mutterrente), designed to compensate parents who take time out from paid employment to raise children.
According to the draft budget, around €36 billion has also been earmarked for the citizen's income (Bürgergeld). More than five million people receive citizen's income in Germany, including children and people unable to work, and numerous experts have suggested that additional funds will soon be necessary.
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The environment
The agreement to ease Germany’s debt break was achieved with the support of the Green party, in return for additional investment in Germany’s Climate and Transformation Fund (KTF).
Now, the SPD finance minister is proposing a Budget Accompanying Act alongside his financial plans stipulating that funds from the Climate and Transformation Fund (KTF) can also be used to reduce gas prices in the form of “compensation payments to ease the burden of electricity and gas prices.”
Germany’s Greens are furious, however.
“The draft budgetary accompanying law reveals the gutting of the Climate and Transformation Fund. Instead of strengthening climate protection and the energy transition the coalition wants to restructure the KTF so that it can be used to finance relief for fossil gas,“ said the Green's budget policy spokesman Sebastian Schäfer in an interview with ARD capital studio.
Taxes
Germany’s basic personal income tax allowance will rise to €12,084 in 2025 and to €12,336 in 2026, resulting in slightly higher net pay for most employees.
The income tax rate will also be adjusted to compensate for inflation to ensure that wage increases meant to cover higher living costs don’t push people into higher tax brackets unnecessarily.
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In a move intended to stimulate investment and economic growth, the government has also approved a €46 billion tax relief package for companies, including accelerated depreciation and a phased reduction of the corporate tax rate by one percentage point per year from 2028, dropping to 10 percent by 2032.
Where is the rest of the money going?
Infrastructure
Large sums are to be invested in upgrading bridges, roads, and energy networks, and in digitalisation, hospitals, and housing construction. Some of the money will be administered by the states, and some will go into a fund for climate protection investments.
A total of around €115.7 billion is to be invested this year, and €123.6 billion next (the figures vary slightly according to sources).
Defence
Defence spending in Germany is set to increase to 3.5 percent of gross domestic product by 2029. Overall, the draft budget aims to achieve a NATO quota of 2.4 percent of gross domestic product in 2025. Spending is set to rise over the next few years to reach 3.5 percent in 2029.
What happens next?
Having now been approved by the federal cabinet, the delayed 2025 budget should be debated in the Bundestag before the summer recess in mid-July, and then the Bundesrat (Germany’s second chamber), with a final decision scheduled for mid-September.
The budget for 2026 is not quite as urgent. The cabinet has now approved key guidelines, with the detailed plan set to be discussed on July 30. If all goes well, the Bundestag could approve the 2026 budget in mid-December.
The budgets for 2027 to 2029 are likely to be more problematic, however, partly because loans taken out by the federal government during the coronavirus pandemic will have to be repaid.
In addition, if increased investment fails to stimulate economic growth, the costs of servicing higher levels of debt could force the government to consider new austerity measures or higher levels of taxation.
With reporting by DPA.
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