Infrastructure Spending Vital to Closing Investment Gap and Boosting Growth

The timely disbursement of the EUR 500bn infrastructure special fund through 2035 is critical for Germany’s growth trajectory. To ensure additionality, investment levels in the core budget will need to be maintained. Planned investments target high-impact projects primarily in road, rail and digital infrastructure, which should address the most urgent needs to narrow the existing investment gap.

If well executed, these investments could lift Germany’s growth potential towards 1%. Before the special fund was announced, Scope had projected that potential growth would decline to around 0.7% by the end of this decade. Nevertheless, execution risks remain high, since many projects need to be completed in a short period of time. This could stretch planning and construction capacity but also lead to higher inflation. Investments also need to be supported by supply-side and labour-market reforms to raise the country’s growth potential above 1% in line with the government’s goal.

Germany Aims to Meet Revised NATO Target by 2029 With Uncertain Growth Effects

The government has significantly raised its ambitions for defence spending. Spending under the NATO definition is planned to increase from 2.1% in 2024 to 2.4% this year and then trend towards 3.5% by 2029, six years ahead of the agreed timeline (Figure 3). As the planned increase affects Germany the most among EU member states when viewed relative to central government revenues, the German government proactively reformed the debt brake to borrow in excess of 1% of GDP for defence spending.

But the growth impact associated with higher defence spending is likely to be moderate, although that remains somewhat uncertain at this stage. The Kiel Institute estimates that fiscal multipliers for defence spending are only around 0.5x, depending on the extent to which equipment is procured domestically, and how quickly production capacity can be increased.

Figure 3: Germany plans to meet revised NATO target of 3.5% of GDP by 2029

NATO defence spending, % of GDP