Turning point | Who pays for the upgrade?

“Protect democracies”: The Helsing drone HX-2 can attack artillery, armored and other military targets at a range of up to 100 km. Photo: Helsing German military spending is growing rapidly. The rearmament is still essentially being financed through new debt. But this should come to an end in the medium term - which leaves the open question of where the money will come from. Because the need for armaments remains high for the foreseeable future. “Politics and society have not yet internalized these dimensions,” says Simon Schuster-Johnson from the Dezernat Z think tank. And according to the economist Achim Truger, the “biggest financial policy challenge of the future – the long-term financing of defense spending, which has so far been largely financed by loans – has not yet really become apparent.”

The federal government wants to spend 140 billion euros on armaments next year - that's 30 percent more than in the current year and twice as much as 2022, the year of the "turning point". Around half of the money goes towards purchasing military equipment. Armament is becoming the “new colossus in the household,” writes Schuster-Johnson in the trade journal “Wirtschaftsdienst”. For the first time, it is closing in on the largest area of ​​expenditure to date, pensions. In a few years, according to Schuster-Johnson, three quarters of the new debt will likely flow into the Bundeswehr and security authorities. They also account for the majority of the increasing interest costs.

The upgrade is already creating gaps in the budget. For next year, the Finance Ministry is planning new debts of around 119 billion euros, after around 98 billion this year. Together with the loan-financed special funds for infrastructure and climate neutrality as well as for the Bundeswehr, the new debts in 2027 will total almost 204 billion euros, according to the cabinet decision. This number will also increase steadily until 2030. This drives up interest costs: the federal government's creditors will receive 42 billion euros this year, and almost double that is estimated for 2030.

According to the federal government, however, this is money well spent in view of an international situation that is slowing down the German economy. “The global crises and conflicts as well as their effects on energy prices and supply chains are making it very difficult to overcome our country’s weak growth,” says the government’s draft budget law. In this sense, increased armaments would be an investment in future economic growth.

By 2030, German defense spending is expected to climb to more than 200 billion euros, around three times what France is planning. Truger recently put the credit-financed share in the magazine “Surplus” at over 150 billion euros, i.e. around three percent of economic output. However, unexpected expenses could arise at any time - after all, US President Donald Trump demanded this week that he wanted "hundreds of billions of dollars" back that the USA had given to Ukraine and NATO "for free". “We will demand this money, albeit a little late,” writes Trump.

"Tanks are not the new cars for the German economy."

On the one hand, however, the defense debt is unlikely to drive economic growth. According to the business-related institute IW, one should not expect a widespread upturn as a result of the rearmament. “Tanks are not the new cars for the German economy,” says IW expert Klaus-Heiner Röhl. On the other hand, the debt contradicts the EU fiscal rules. “In the medium term,” says the IW, “the federal government will have to pay for defense spending again from its regular budget.”

However, according to Truger, the federal government “apparently doesn’t have anything close to a plan” for this. But this plan is urgently needed. "We would need a convincing, socially just concept that prevents defense spending from being played off against the welfare state and investments in the future." In fact, this could be a mammoth task, because the necessary financial requirements are gigantic at an estimated 200 billion euros.

A further reform of the debt brake could bring some relief. In addition, one can hope for stronger economic growth, which will bring in more funds for the budget. But you shouldn't expect miracles from this, says Truger. Even under optimistic assumptions - debt brake reform and 1.5 percent growth for ten years - there would still be an unmet need of 110 billion euros - with a total budget volume of 600 billion.

Therefore, spending cuts are already being called for; the Kiel Institute for the World Economy sees the “need for consolidation measures”. However, the federal government's medium-term financial planning already includes major cuts in almost all expenditure for the next few years. “By 2030, spending excluding defense and interest is expected to fall by more than 16 percent in real terms, and investments by around 20 percent compared to 2026,” says Patrick Kaczmarczyk, economist at the University of Mannheim. This means that cuts will be made in almost all other areas in favor of massively increasing military spending - in infrastructure, transport and public services.

Even if the consolidation were successful, says Schuster-Johnson, its dimensions would be too small. "Theoretically, all pension spending would have to be canceled in order to finance the rearmament," he writes. In addition, in the 2030s almost 90 percent of the budget is likely to be tied up in social and personnel expenses. The consolidation would primarily affect education and other public services.

So all that remains is tax increases. But here too the dimensions would be gigantic. In order to close the - optimistically estimated - gap of 110 billion euros, according to Truger's calculation, the solidarity surcharge would have to be increased almost ninefold. Alternatively, the entire wage and income tax would have to be increased by a third or the anti-social value added tax by seven percentage points to 26 percent. And even a one-off wealth levy would have to have a gigantic dimension of almost 25 percent of economic output and could only cover financial needs for ten years. Rising defense spending is "a ticking time bomb for German financial policy, for which neither politicians nor the public are sufficiently prepared," writes Truger.

So the question remains where the federal government wants to get the money for Germany's geopolitical awakening - or rather: from whom it wants to take it. Especially since major projects such as the expansion of infrastructure and climate protection are added to the upgrade. This requires “fundamental reform and perseverance,” says Schuster-Johnson. The probability that the federal budget will provide enough money for these major projects, but will get by with less debt and without new burdens, is zero. “If defense needs continue to be high but are not to be financed permanently and entirely with loans, tax increases may be unavoidable.” Designing these in a growth-friendly manner is “not trivial.”

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