This article was the Topic of the Week in the KW 44 Newsletter for 2025.

Revenue Stagnation Despite Tax Increase

Without economic growth, public revenues remain stagnant. This connection is once again highlighted by the results from the Tax Estimation Working Group published on October 23, 2025. The latest projection from experts spanning federal, state, municipal, and academic contexts indicate a lack of additional fiscal room for upcoming negotiations to be led by Federal Finance Minister Lars Klingbeil with his counterparts—especially considering the Federal Ministry of Finance anticipates a significant funding shortfall of 30 billion euros in the 2027 federal budget.

Compared to the May 2025 estimate, the federal government predicts additional income of approximately two billion euros for the current year, five billion euros for 2026, but reduced revenues for 2027 and 2028. Consequently, no cumulative increases are expected until 2029 relative to the spring projections. States and municipalities fare only slightly better over the same period.

Moderate Economic Recovery Anticipated

The latest forecast is based on the federal government's autumn projection, which anticipates a modest economic recovery next year. The real gross domestic product is expected to grow by 1.3 percent in 2026 and 1.4 percent in 2027. For the current year, the government now projects slight growth of 0.2 percent—a minor improvement compared to spring projections. The primary driver of this development is domestic demand.

Consequently, VAT and payroll tax particularly contribute to stabilising tax revenues. For 2025, VAT is expected to grow by three percent compared to 2024, while payroll tax is predicted to increase by five percent.

Burden on Corporate Taxes Impacting Investment Potential

The persistently weak economic development has significant negative effects on corporate taxes. Tax estimators predict a two-percent drop in corporate income tax compared to the previous year for 2025. The trade tax, a key factor for municipalities, remains stagnant. However, an increase of six percent is expected in assessed income tax, which primarily affects self-employed individuals and partnerships.

Growth Requires More Than Tax Policy

Through the "Infrastructure and Climate Protection" special fund, the federal government aims to comprehensively modernise public infrastructure at the federal, state, and municipal levels. Should the planned 500 billion euros be invested over the coming years in addition to regular budget resources, growth stimuli could emerge—provided the funds are directed into public infrastructure projects that positively impact private investments.

Competitiveness as Key to Solid Budgets

Economic prosperity predominantly stems from businesses. Considering that state investments and services are financed by current (or increasingly future) private tax payments, wealth is fundamentally created through the value generation in businesses. Stable and efficient economic frameworks are essential for companies to succeed in international markets.

From an economic perspective, this means focusing on competitiveness and economic growth. Public expenditures should increasingly be assessed based on their contributions to these objectives and prioritised accordingly. Growth consequently leads to rising state tax revenues: Each additional growth percentage point generates approximately 10 billion euros in additional state revenue.