Budget adoption by the Commission remains pending.
Germany's 2026 Budget: Austerity Measures and Growth Incentives
Germany's Finance Minister, Lars Klingbeil, has unveiled plans for the country's 2026 federal budget, which emphasise austerity measures to address a significant medium-term financial gap. The budget aims to strike a balance between cost-cutting and stimulating economic growth.
The budget draft reveals a savings rate of 2% for 2026, with a total new debt of €174 billion planned, €89.9 billion of which is to be borrowed in the core budget. To achieve these savings, Klingbeil has proposed several measures.
Austerity Measures
- Cuts in Official Development Assistance (ODA): The budget for development cooperation (BMZ) is projected to drop below €10 billion in 2026, a significant decrease from 2024 levels. This reduction in development aid may impact humanitarian programs.
- Overall Federal Budget Reduction: The 2025 budget saw a 2% cut compared to 2024, with various ministries, including the Foreign Office (AA), Ministry for Economic Cooperation and Development (BMZ), and Ministry for Economic Affairs and Climate Action (BMWK), experiencing reductions.
- No Significant Increases in Climate Funding: The 2026 budget maintains climate action funding at a stable level, with no major cuts but also no growth.
Growth Incentives
- VAT Reduction on Restaurant Meals: The Value Added Tax (VAT) on restaurant meals is planned to be reduced from 19 to 7 percent, as advocated by the CSU.
- Commuter Allowance Increase: The commuter allowance is set to increase to 38 cents from the first kilometer in 2026.
The budget also includes more funding for social housing construction, kindergartens, and the continuation of the Germany ticket in local transport. However, the Ministry of Health has expressed concerns that these loans may not be sufficient to prevent contribution increases in 2026.
Defense spending is planned at around 128 billion euros in 2026, with significant increases expected in the coming years. The draft budget also includes an increase in investments to 126.7 billion euros, allocated for projects such as infrastructure renovation, digitization, and education.
Klingbeil has high expectations for the work of the reform commissions on social security, believing there is potential for savings. The commission on health insurance is only supposed to present proposals in the spring of 2027 according to the coalition agreement. The draft budget for 2026 does not guarantee that health insurance contributions will not increase.
Consultations on the 2025 budget are currently underway in the Bundestag. Klingbeil has announced that he will closely monitor the VAT reduction to ensure price reductions reach customers and make prices more affordable. Cuts are planned in the 2026 budget, including development spending and staff reductions in the federal administration, but not at security authorities.
The fight against tax evasion and financial crime is also a focus to strengthen revenues. The 2026 budget plans aim to strike a balance between austerity measures and growth incentives, while adhering strictly to the constitutional debt brake to ensure no new debt-induced increases.
[1] Bundesregierung [2] Deutsche Welle [3] Handelsblatt [4] Spiegel Online
Personal finance advisors might suggest individuals and businesses in Germany to budget carefully in light of the 2026 federal budget, which features austerity measures like reduced development aid and departmental budget cuts, while also offering growth incentives such as a VAT reduction on restaurant meals and an increase in the commuter allowance. The balance between cost-cutting and stimulating economic growth is a key aspect of this budget, with the aim of maintaining growth while adhering to the constitutional debt brake.
