The annual assessment by the Council of Economic Experts at the Chancellery in Berlin is always something of a report card.
This is first time the panel has presented its findings to the government of Chancellor Friedrich Merz (CDU), which took office six months ago.
It is particularly important because the coalition of the conservative Christian Democratic Union (CDU) and its Bavarian sister party, the Christian Social Union (CSU) and the center-left Social Democrats (SPD) have declared economic growth a top priority.
But the fact is that the German economy is not emerging from its crisis.
No real upturn in sight
Gross domestic product (GDP), which is the sum of all economic output, is expected to grow by a measly 0.2% this year. In 2026, it is expected to be 0.9%. But in the light of the past few years, it is at least something. “After two years of recession, the economic trend in Germany is finally turning from negative to positive again this year, ” said Monika Schnitzer, Council of Economic Experts’ Chair.
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However, Germany is clearly lagging behind its European counterparts and is a long way from a real upturn. “For the economy to get back on a sustainable path of growth, productivity must increase, particularly through more innovation and investment,” warned Schnitzer. She also said Germany had to develop new growth and security policy perspectives in view of the current geopolitical and structural challenges.
Instead of investing, budget holes are being plugged
The title of this year’s report, ‘Creating prospects for tomorrow, not squandering opportunities,’ alludes to the Special Fund for Infrastructure and Climate Neutrality (SVIK), which the coalition has launched. The fund allows loans totalling up to €500 billion to be invested in infrastructure projects, such as transport, digitalization or the construction of schools.
The panel thinks this financial package could have a considerable impact on growth. But its calculations indicated that the money might end up being diverted elsewhere. Schnitzer expressed concern that the actual growth impact would remain rather low in this case.
According to the report, the special assets should not be used to enable the financing of “questionable measures” — such as the expansion of the ‘mothers’ pension’ or an increase in the tax rebate granted to car drivers for their commute to work — that come at the price of long-term budgetary stability. “It is therefore urgently advisable to adjust these plans if the opportunities offered by the financial package are not to be squandered,” Schnitzer warned.
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The government does not have to follow the advice of experts
Mer and Federal Labor Minister and SPD Chair Bärbel Bas listened to the criticism with deadpan expressions. It is unlikely that the government will change its plans. The financial needs and holes in the budget are too big. “We have made some decisions here of a political nature that are viewed critically by you, ” said Merz, taking note of the experts’ warnings.
The government does, however, agree with many other statements in the report. “We also share the assessment that the high burden of tax and other deductions is hampering investment activity in Germany. The cost competitiveness of our economy must improve, ” said Merz. Germany’s high energy costs are another factor here. Negotiations are currently underway with the EU to reduce electricity costs. “I can assure you that the federal government is very keen to find solutions in Brussels this year.”
Tax breaks and subsidies
Merz once again listed what else was planned to get Germany back to 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 the reform of social security contributions.
The contributions that employers and employees pay into health and long-term care insurance and pension funds have been rising unabated for years. Germany is an ageing society, with a dwindling number of workers having to finance more and more pensioners. Subsidies of over €120 billion will flow into the pension funds this year. That is the largest item in the budget.
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A lot of wealth and a lot of poverty in Germany
In their report, the economic experts recommend doing more for private pension provision. They say that wealth inequality in Germany is high by European standards. The state must help private households build assets, for example, through a state-supported pension portfolio that could be used for both private pensions and general wealth accumulation.
An estimated 30 to 50% of private wealth comes from inheritances and gifts. The researchers are critical of the fact that inheritances and gifts are taxed differently. Business assets in particular get special treatment. To help avoid companies having to be sold or closed down because the new owners cannot pay the inheritance tax out of their existing private assets, very large inheritances and gifts are often taxed at a comparatively low rate.
The experts recommend significantly reducing tax relief of this kind and instead introducing options to make staggered payments.
The SPD, as well as the opposition Greens and Left Party, have already made similar inheritance tax reform proposals. The CDU and CSU, on the other hand, are of the opinion that companies are not sufficiently safeguarded. The Federal Constitutional Court is currently examining inheritance tax rules in Germany. Depending on its ruling, the government may soon be forced to reorganize the tax.
This article was originally written in German.
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