A major reason for the collapse of the traffic light coalition was the disagreement over how the state should finance its core tasks in the future. At the heart of the debate lies the issue of national debt. It is clear that Germany requires more investment. This applies to public infrastructure (roads, railways, energy grids, digital networks), external and internal security, but especially to private sector investments by businesses.

The debate ahead of the early federal election in 2025 is intensively centred on whether the state should function within its revenue limits or to what extent expenses can be financed by loans. Since 2009, the German constitution (Grundgesetz) limits federal borrowing through the debt brake, and the reform of this instrument is also under discussion.

Resilience through sound fiscal policies

The crises of recent years have demonstrated that responsible fiscal policy significantly contributes to the resilience of states. For example, Germany’s solid public finances at the start of the COVID-19 pandemic enabled extensive public support for the domestic economy during this challenging time. When Russia launched its military aggression against Ukraine, additional public spending was directed towards cushioning energy costs and bolstering defence capabilities. The German Basic Law allows for the suspension of the debt brake in emergencies, thereby enabling robust governmental action. However, during this period, Germany’s debt levels rose significantly, while interest expenses surged due to higher borrowing and rising interest rates. Additionally, the economy’s stagnation over the past two years has prevented debt from being overcome through growth, as tax revenues have not risen as quickly as public expenditures. This highlights that resilient and capable public budgets can only be sustained in the long term through positive economic growth.

High public revenues bolster growth strategy

Despite the challenging situation, the federal budget still offers potential for growth-promoting action by the new government. Contrary to public discourse suggesting empty coffers, revenues continue to rise: By 2026, all levels of government (federal, state, and local) will have combined revenues exceeding €1 trillion—double the amount in 2008. Furthermore, various federal special funds exist, such as the Climate and Transformation Fund (KTF), funded by revenues from CO₂ certificate trading and the CO₂ tax, offering nearly €22 billion to support the economy’s decarbonisation. At least until 2027, higher defence expenditures are guaranteed through the Bundeswehr special fund, which provides loans amounting to €100 billion.

Stable conditions secure investments

90% of all investments in Germany are private, making it essential to strengthen business activities. Only when the conditions are right, businesses take the risk of committing resources to build and expand locations, promote innovation, and create jobs.

For Germany’s export-driven economy and the EU, trust in the euro by financial markets is a crucial component of sustainable fiscal policy. Clear fiscal rules effectively safeguard this trust by ensuring budgetary discipline, setting limits for public expenditure and its debt financing. Sustainable public debt levels preserve fiscal flexibility and ultimately limit future tax burdens on businesses. What happens when capital markets lose confidence in a member state's financial stability is exemplified by France, where significantly higher interest rates on long-term debt instruments have been required in recent weeks.

The debt brake builds trust while remaining flexible

The debt brake serves as a stabilising and trust-building instrument and should not be misconstrued as a prohibition. In the coming year, annual new borrowing of nearly €50 billion will be possible without invoking exceptions due to emergencies. While fiscal rules are not immutable, the core functionalities of the debt brake should not be altered to the point of ineffectiveness. Any shift towards financing “investment” measures would revert to the "Golden Rule," which until 2009 allowed for unlimited financing of vaguely defined investments and ultimately failed as a result. By late 2009, Germany faced significant debt of €1.6 trillion, which has risen further due to crisis interventions, reaching €2.445 trillion by the end of 2023 under the current debt brake.

Ultimately, future generations will also have to bear the consequences of today’s credit financing. Thus, when making decisions, not only potential investments but also the burdens of repayment and interest payments must be considered. In any case, the core task of politics remains one of constant prioritisation. Only through a sustainable growth strategy, with more substantial investments in infrastructure, education, and research, will private investments—and subsequently positive economic development—be triggered.