The annual assessment by the Council of Economic Experts at the Chancellery in Berlin is always a report card moment.
And it is the first time the panel has presented a report to the government of Chancellor Friedrich Merz (CDU), which took office six months ago.
This is particularly important because the conservative Christian Democratic Union (CDU) and its Bavarian sister party, the Christian Social Union (CSU) and a coalition of centre-left Social Democrats (SPD) have declared economic growth a top priority.
But the truth is that the German economy is not able to emerge from its crisis.
No real reversal in sight
Gross domestic product (GDP), the sum of all economic output, is expected to grow a modest 0.2% this year. It is expected to be 0.9 percent in 2026. But in light of the past few years, it’s at least something. “After two years of recession, economic trends in Germany are finally turning from negative to positive again this year,” said Monica Schnitzer, chair of the Council of Economic Experts.
However, Germany clearly lags behind its European counterparts and is far from real progress. “To get the economy back on a sustainable path of growth, productivity must increase, especially through greater innovation and investment,” Schnitzer warned. He also said that Germany will have to develop new development and security policy perspectives in light of current geopolitical and structural challenges.
Instead of investing, budget flaws are being plugged
The title of this year’s report, ‘Creating possibilities for tomorrow, not wasting opportunities’, points to the Special Fund for Infrastructure and Climate Neutrality (SVIK), which the coalition has launched. The fund allows loans of up to 500 billion euros to be invested in infrastructure projects such as transport, digitalisation or the construction of schools.
The panel believes that this financial package could have a significant impact on growth – possibly at least. But its calculations indicate that the money may be diverted elsewhere. Monica Schnitzer expressed concern that the actual development impact in this case would be small.
According to the report, special assets should not be used to enable the financing of “questionable measures”, such as the extension of ‘mothers’ pensions’ or the increase in tax breaks given to car drivers for commuting to work – at the expense of long-term budgetary sustainability. “It is therefore urgently advisable to adjust these plans if the opportunities offered by the fiscal package are not to be wasted,” Schnitzer warned.
The government does not need to follow the advice of experts
Friedrich Merz, Chancellor and CDU Chairman, and Federal Labor Minister and SPD Chairman Bárbel Bas, listened to the criticism with impassive expressions. It is unlikely that the government will change its plans. The financial needs and budget holes are huge. “We have made some decisions of a political nature here that you are looking at critically,” Merz said, heeding experts’ warnings.
However, the government agrees with many other statements in the report. “We also agree with the assessment that the high burden of taxes and other cuts is hindering investment activity in Germany. The cost competitiveness of our economy must improve,” Merz said. Germany’s high energy costs are another factor here. Negotiations are currently underway with the European Union to reduce electricity costs. “I can assure you that the federal government is very keen to find a solution in Brussels this year.”
Tax exemptions and subsidies
Merz once again listed what else was planned to get Germany back in business again – from targeted tax incentives to encourage companies to invest in machinery, equipment and digitalization to a reduction in corporate taxes from 2028 and improved social security contributions.
The contributions that employers and employees make to health and long-term care insurance and pension funds have been increasing unabated for years. Germany is an aging society, with a declining workforce that requires more and more pensioners to be financed. More than €120 billion in subsidies will flow into pension funds this year. This is the biggest item of the budget.
Too much wealth and too much poverty in Germany
In their report, economic experts recommend doing more for private pension provision. He says wealth inequality in Germany is high by European standards. The state should help private households create wealth. For example, through state-backed pension portfolios that can be used for both private pensions and general wealth accumulation.
An estimated 30 to 50% of personal wealth comes from inheritances and gifts. Researchers are critical of the fact that inheritances and gifts are taxed differently. Commercial assets in particular get special treatment. To help companies avoid being sold or closed down because the new owners cannot pay inheritance tax from their existing personal assets, very large inheritances and gifts are often taxed at a comparatively low rate.
Experts recommend significantly reducing this type of tax relief and instead offering the option of making phased payments.
The SPD, as well as the opposition Greens and the Left Party, have already made similar inheritance tax reform proposals. On the other hand, the CDU and CSU are of the opinion that companies are not given adequate protection. The Federal Constitutional Court is currently investigating inheritance tax rules in Germany. Depending on its decision, the government may soon be forced to restructure the tax.
This article was originally written in German.
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