Germany Plans Major Fiscal Expansion in 2026 Amid Rising Public Debt
Date: October 26, 2025 | Category: Global Economy, Fiscal Policy, European Markets
Germany is set to implement a major fiscal expansion in 2026, driven primarily by higher government spending rather than tax cuts or investment surges. According to economists at Barclays, the general government deficit is expected to widen to 4.1% of GDP in 2026, compared with 2.9% in 2025. The primary deficit is projected to increase to 2.8% of GDP, while public debt is forecast to climb to 65.8% of GDP.
A report led by Silvia Ardagna from Barclays indicates that this fiscal expansion will be broad-based, with spending increases spread across multiple areas rather than concentrated as in previous years. The fiscal impulse — or direct impact of fiscal policy on economic growth — is expected to be significant.
Government projections estimate a 1.6 percentage point expansion of GDP in 2026, while Barclays’ forecast is slightly lower at 1.2pp. Following a minor fiscal consolidation in 2024 (0.3pp) and a 0.5pp expansion in 2025, next year’s fiscal boost is expected to be considerably stronger.
The deficit increase in 2025 is mainly attributed to rising social benefits, up by 1.2 percentage points to 26.5% of GDP, while public investment rises only marginally (0.15pp). Analysts warn that this mix is “not particularly growth-friendly,” as social spending typically carries a lower fiscal multiplier than public investment or tax cuts.
In 2026, overall spending will expand by 1.3 percentage points of GDP, evenly distributed across social programs, current expenditures, capital transfers, and public investment. Defence spending will rise by approximately €18 billion, pushing total defence expenditure to 2% of GDP. Meanwhile, income tax revenue will fall by 0.25pp due to new tax exemptions for retirees and slower growth in the overall tax base.
The German government has also announced a €500 billion Special Investment Fund to finance infrastructure and innovation projects from 2025 to 2037. However, analysts suggest that not all of this funding will result in new capital formation, as some may offset existing budgeted expenses.
According to Barclays, the upcoming fiscal expansion could boost GDP growth by 0.6 to 0.8 percentage points. Nevertheless, they caution that external factors such as tariff tensions, geopolitical instability, and climate transition costs could temper the growth impact.
“It is not assured that German growth will increase as much,” Barclays’ analysts warned, citing potential headwinds that could limit the fiscal stimulus effect.
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