Germany’s fiscal landscape is on the verge of major transformation, after a supermajority of the outgoing Bundestag approved a constitutional amendment to adjust the debt brake for defence spending and establish a EUR 500 billion special infrastructure fund that will span 12 years and cover investments over the next three legislative periods. These events set the scene for the incoming governing coalition between the CDU/CSU and SPD, which, as the (likely) future federal government, has already published an exploratory paper with initial indications of political changes in the coming years.
A. Introduction
On 8 March 2025, almost two weeks after snap Bundestag elections, the CDU/CSU and the SPD – the parties likely to form a coalition government in the coming legislative period – reached agreement on a joint exploratory paper (Sondierungspapier). The paper forms the basis for coalition talks and gives initial insights into expected government policy for the next four years.
Included in the paper is a EUR 500 billion special fund intended for infrastructure, education, digitalisation, energy and healthcare investment. It also outlines plans to relax the debt brake (Schuldenbremse) in order to enhance the defence capabilities of Germany and the EU.
In terms of the economy (which we examine in more detail below), the CDU/CSU and SPD aim to increase Germany’s competitiveness by restoring confidence, acting decisively and improving planning security. Their declared goal is to return economic growth to well over 1 %, and they propose several measures to promote investment and innovation for sustainable growth, new prosperity and jobs (see B below). The parties also reaffirm their general commitment to climate targets and independent research.
The exploratory paper coincides with draft constitutional amendments proposed by the CDU/CSU and SPD, which they want to pass using the outgoing parliament’s supermajority. CDU/CSU and SPD want to relax limits on government borrowing and create a special fund for infrastructure repairs (see C for details). The rushed approach stems from concerns that the blocking minority of the Alternative für Deutschland (AfD) and Die Linke parties in the newly elected Bundestag could prevent changes to the German constitution (Basic Law, Grundgesetz), which require a two-thirds majority. According to Article 39(2) Basic Law, the new parliament must convene no later than the 30th day after the elections, meaning that reform of the debt brake had to be decided by 25 March 2025.
B. Proposed economic measures
- Low, predictable and internationally competitive energy costs: According to the exploratory paper, the parties plan to reduce electricity tax to the minimum rate required by European law (0.05 ct/kWh) and halve transmission grid fees to achieve rapid relief of at least five cents per kilowatt hour (kWh). The aim is to permanently cap grid charges. Regulations on electricity price compensation are to be extended to other energy-intensive sectors and compensation is to be renewed. The parties propose advancing grid expansion rapidly, strategically and cost-effectively.
- Increased energy supply to stabilise and reduce electricity costs: Reserve power plants are to be used not only to avoid supply bottlenecks, but also to stabilise the price of electricity. The parties want to incentivise the construction of up to 20 GW of gas-fired plant capacity by 2030 – primarily at existing plant sites – and utilise the potential of all renewable energies. Alongside the decisive and grid-friendly expansion of solar and wind energy, that also includes the expansion of bioenergy, hydropower, geothermal energy and storage capacity.
- CO2 neutrality of energy-intensive industry: The parties plan to pass a legislative package that enables the capture and storage of carbon dioxide (CCS), particularly for emissions from the industrial sector that are difficult to avoid. The hydrogen core network must connect industrial centres nationwide.
- Lead markets for climate-neutral products: The parties intend to create lead markets for climate-neutral products, e.g. through quotas for climate-neutral steel, a green gas quota and procurement law requirements.
- Strengthening strategic industries: The parties plan to retain strategically important industries and attract new ones. Industrial clusters – for example in the semiconductor sector in eastern German federal states – are to serve as an example of this approach. The parties want to make use of the opportunities offered by the European Chips Act and the Important Projects of Common European Interest (IPCEI).
- Ensuring the automotive industry remains a key sector: The parties reiterate their commitment to retaining Germany’s automotive industry and the jobs it provides. To this end, they want to rely on technology neutrality and actively work towards averting fines for failure to meet fleet emissions targets. At the same time, e-mobility is to be promoted through purchase incentives. The parties intend to support suppliers to help them manage the transformation.
- Relief for the middle class: The paper plans to relieve the wider middle class through income tax reform and increased commuter allowance.
- Incentivising and leveraging investments: The parties plan to provide tangible incentives for entrepreneurial investment in Germany. They want to embark on corporate tax reform in the coming legislative period and use a combination of public guarantees (e.g. from promotional bank KfW) and private capital in order to establish investment funds to provide equity and debt capital, e.g. for venture capital, housing construction and energy infrastructure.
- Support for the gastronomy sector: The paper plans to permanently reduce value-added tax (VAT) on food to 7 %.
- Support for farmers: The parties intend to fully reinstate agricultural diesel reimbursement.
- Reducing bureaucracy: The parties plan to reduce bureaucracy, for example by abolishing reporting, documentation and statistics obligations. They also want to significantly reduce the number of company officers required by law, based on the proposal by the German Regulatory Control Council (Normenkontrollrat) to reduce bureaucratic costs for companies by 25% over the next four years.
- Prioritising innovation, research and digitalisation: A “high-tech agenda” is planned for research, innovation, technologies, transfer and entrepreneurship. The parties want to better promote fusion research with the goal of building the world’s first fusion reactor in Germany. Greater use of the opportunities offered by artificial intelligence and digitalisation is to be made, which will require a massive increase in R&D funding. Administrative procedures are to be digitalised nationwide, data registers be networked, and administrative processes automated.
- Expanding free trade: The four economic partnership agreements introduced to the Bundestag by the current government shall be reintroduced and adopted in the same wording. The parties are also committed to the entry into force of the Mercosur Agreement and the conclusion of new free trade agreements, including with the US. At the same time, they want to protect Germany’s industry from unfair trade and subsidy practices.
C. Draft constitutional amendments agreed regarding debt brake reform and special funds
The debt brake stipulates that the budgets of the federal and state governments must always be balanced without revenue from borrowing. This regulation has its basis in Article 109 Basic Law. The debt brake principle is generally satisfied if borrowing does not exceed 0.35% of nominal GDP (Article 115(2), sentence 2 Basic Law).
The draft constitutional amendments proposed by the CDU/CSU and SPD state that due to fundamental changes in the security architecture as a result of the Russian war against Ukraine and further expected geo-economic and security policy tensions – particularly regarding the change of policy in the US – Germany and Europe will have to shoulder major financial burdens.
It is assumed that the Bundeswehr’s special fund will not be sufficient to close the capability gaps. In general, it is assumed that there is a great need for financing at federal and state level, especially in infrastructure.
To be able to meet requirements on this scale in the coming years, medium-term planning security is required. The three key constitutional amendments (to Articles 109, 115 and 143h Basic Law) that the draft bill requires to this end have been adopted by both the Bundestag and the Bundesrat:
- Limited exemptions under the debt rule for defence spending, spending on civil defence and intelligence services, and spending to protect information technology systems and to assist countries attacked in violation of international law: The draft aims to provide further fiscal leeway to strengthen the alliance and defence capability of the Bundeswehr by changing Article 109(3) and Article 115(2) Basic Law while also seeking to enhance domestic security. The federal government is therefore authorised to supply additional budget funds for necessary expenditure on defence as well as on intelligence services, civil defence and IT security. Necessary spending in these sectors above 1% of GDP will then be exempt from the debt brake. Financial aid for countries attacked in violation of international law is also included in this exemption.
- Limited additional debt leeway for the federal states: The federal states as a whole are given a limited structural debt leeway of 0.35 % of GDP, regardless of their economic situation. The federal states themselves will decide on the specific use within the framework of their budgetary autonomy.
- Special infrastructure fund and climate neutrality: A new Article 143h Basic Law authorises the federal government to set up a special fund with its own credit authorisation of up to EUR 500 billion over the term of the fund for investments in national infrastructure and to achieve climate neutrality by 2045. Total transfers of up to EUR 100 billion from the fund to the Climate and Transformation Fund for climate purposes are also permitted. The special fund has a term of 12 years. Up to EUR 100 billion of its funds will be earmarked for infrastructure investments by the federal states and municipalities. These credit authorisations are also exempt from the debt brake. The increase in spending on public investment is expected to stimulate additional private sector activity.
The bill introduced by the CDU/CSU and SPD to amend the Basic Law originally aimed only to exempt defence spending from the debt brake. The special fund was also initially intended only for infrastructure projects. However, after a revised draft by the CDU/CSU and SPD and a separate proposal from BÜNDIS 90/DIE GRÜNEN, the Bundestag approved the constitutional amendment on 18 March 2025, adopting it with the additional exemptions from the debt brake and including climate neutrality as an objective within the special fund. The investment focus explicitly includes civil protection, transportation and energy infrastructure, climate protection, and educational and healthcare facilities. A key priority is financing heating and energy networks from the special fund. A further central concern aside from climate goals is the functionality of national infrastructure.
As part of the legislative process, the Bundestag also passed a resolution jointly proposed by the CDU/CSU and SPD and BÜNDIS 90/DIE GRÜNEN. Just days before the new Bundestag is due to convene, the resolution calls on the new federal government to ensure core budget funding for the Renewable Energy Sources Act. It also presses for a new commission of experts with responsibility for further modernising the debt brake, thereby strengthening Germany through additional investments.
While securing the necessary two-thirds majority for the Bundesrat’s adoption of the bill was initially uncertain – particularly as regards support from Bavaria – the Bundesrat approved the bill and passed the constitutional amendment on 21 March 2025. Twelve of Germany’s 16 federal states, including Bavaria, voted in favour with the requisite two-thirds majority. An attempt by the AfD to stop the vote that same morning by means of an urgent application to the Federal Constitutional Court failed.
D. Conclusion and next steps
On 21 March 2025, the Bundesrat passed the “debt package” shortly before the new federal parliament convened. The special fund for infrastructure and climate protection will also benefit the federal states, increasing their debt ceiling for infrastructure investments by EUR 100 billion. The debt brake will also explicitly be relaxed for the federal states. The incoming federal government faces the challenge of significantly strengthening both national and alliance defence capabilities, requiring expanded, functional and modern infrastructure that it intends to achieve through the approved constitutional amendments. The law is expected to be enacted next week, with the Office of the Federal President presently conducting its review of whether the legislative process was in accordance with the constitution. No hurdles to enactment are anticipated, however. Companies should closely monitor and assess the extensive investment plans outlined in the parties’ exploratory paper, as well as the new investment opportunities and incentives arising from the legal changes.
Forward
