Germany’s Council of Economic Experts expects the economy to grow 1.3% in 2026, but says the recovery will not solve looming budget problems as defense spending and other government commitments strain public finances.

The council also forecasts inflation rising from 2.2% in the previous year to 2.8% in 2026 and 3.3% in 2027.

Chair Monika Schnitzer warned that borrowing to fund defense could leave a roughly €300 billion funding gap by 2040, and said election promises—including the proposed mothers’ pension, estimated to cost €5 billion a year—need to be reconsidered.

The experts argue that consolidation should start with subsidy and tax-break cuts, including benefits for diesel, company cars and commuting, alongside pension reforms such as reversing the planned Mütterrente III and reconsidering the pension-level guarantee.

Karl Lauterbach opposed the maternity-pension increase and called for lower civil-service pension costs, while defending the early-retirement option known as the pension at 63.

Lauterbach also said healthcare could save €20 billion to €30 billion annually by reducing unnecessary procedures, limiting low-quality hospital services and curbing spending on costly, low-value medicines.

The council proposes combining housing benefit, the child supplement and basic income support, saying the change could reduce poverty risks and save up to €1.7 billion for the federal government, though municipalities would face higher costs.

Because defense is a national responsibility but its costs fall mainly on the federal budget, the authors say the states should contribute appropriately, including by directing more additional shared-tax revenue to the federal government.

For the longer term, the experts propose reducing permitted defense borrowing by 0.25 percentage points annually from 2031 and embedding the phaseout in the constitution, although they say there is no clear majority for the amendment.

Even after the proposed measures, the council estimates a financing gap of at least 2.4% of GDP, making additional revenue from consumption or income taxes potentially unavoidable once spending cuts and efficiency reforms have been exhausted.

The experts note that VAT increases are less distortionary but regressive, while income-tax increases are more progressive but can create stronger economic disincentives; members have not settled on a specific tax increase.

Schnitzer urged politicians to explain the trade-offs openly and involve voters in choosing priorities, rather than making promises that cannot be funded.