A fiscal gap of 172 billion euros by 2029 in Chancellor Friedrich Murch’s projections is emerging as a central issue in Germany, intensifying pressure for reforms to the constitutional debt brake.

The deficit, spread over four years, was reflected in the medium-term economic plan and the 2026 budget, which were approved by the cabinet on Wednesday.

The hole was widened by 30 billion euros in a month after the approval of tax breaks, pension increases and a rise in debt-servicing rates, a government official said.

The budget shortfall widened by €30 billion in just one month, following the approval of tax breaks, pension increases, and higher debt servicing costs, according to a government official.

Although Merz has relaxed some borrowing limits to boost defense and infrastructure, he remains bound by the constitutional debt brake for the core budget. His governing coalition is now considering cuts to unemployment benefits and the elimination of certain subsidies.

If those measures prove insufficient—and without a clear economic recovery on the horizon—broader political consensus may be sought to ease the debt brake, with formal proposals expected in 2026.

Veronika Grimm, a member of the Council of Economic Experts, noted: “The government has borrowing capacity, but no liquidity.” Merz’s call for necessary spending cuts contrasts with the simultaneous promotion of a €500 billion investment fund and plans to double defense spending.

The government’s plan hinges on a gradual economic recovery, which Grimm argues is not sustainable without structural reforms. The economy is already under strain, with GDP shrinking by 0.1% in the second quarter. Growth is forecast to reach just 0.2% in 2025, before rising to 1.1% in 2026 and 1.6% in 2027.

Recently agreed 15% trade tariffs with the U.S. further cloud the outlook. Merz warned these will have “serious consequences” for the economy.

Despite mounting pressure, investors remain optimistic due to the government’s willingness to increase spending and borrowing. The DAX index is near record highs, up more than 30% over the past year.

A major test will come in the fall, when the coalition must approve cuts to social spending. For Lars Klingbeil, the Deputy Chancellor and Finance Minister, this will also serve as a test of party unity, following his relatively weak 65% support in the Social Democrats’ leadership vote.

Merz, who previously amended the debt brake for defense spending through a supermajority vote, now faces limited options. The rise of the AfD and the inability to work with the Left Party (Linke) complicate any further constitutional changes.

Grimm warns that reforming the debt brake would amount to undermining fiscal discipline. Meanwhile, Jens Südekum, economic advisor to Klingbeil, projects a €30 billion deficit in 2027 and stresses the need for realistic ministry-level cuts to balance the core budget.