The Bundesbank considers it important to further reform the debt brake and has presented a contribution to the debate. This contribution builds upon the Bundesbank’s reform proposals from early 2025 and takes into account the new underlying situation brought about by the reform of the fiscal rules in March 2025. The reformed German fiscal rules permit large deficits. Under these rules, the debt ratio could increase to almost 90 % by 2040 and even rise beyond 100 % over the longer term. The recommendations now presented by the Bundesbank for a future reform of the debt brake aim to stop this upward trend over the medium term and to anchor the debt ratio back at 60 % in the future. 

The Bundesbank’s recommendations represent a consistent overall package that safeguards effective fiscal policy and sound public finances: 

• The package sets out a framework for systematic and steady budgetary and fiscal policy.
• It reliably safeguards sound public finances and takes the EU rules into account.
• In the transitional phase, the amount of defence spending financed by borrowing is gradually reduced. Fiscal leeway is thus directed increasingly towards investment.
• In the target zone, the fiscal leeway for investment is stabilised. The proposal thus follows on from the Infrastructure and Climate Neutrality Fund. 

Better safeguarding investment, providing reliable prospects

Germany’s fiscal rules were fundamentally reformed in March 2025. Extensive scope for borrowing was created in order to address the major challenges in the areas of defence and infrastructure. This is appropriate on a temporary basis. 

In the Bundesbank’s view, however, persistently high deficits come with significant risks and side effects: a sharply rising debt ratio narrows the fiscal scope going forward, and public finances gradually lose their resilience. Government might then be less supportive of households and firms in times of crisis, and there would be the risk of clashes with a stability-oriented monetary policy. 

It is therefore important to have fiscal rules that ensure sound public finances and compliance with EU rules over the longer term. From the Bundesbank’s perspective, the fiscal rules can be designed to better safeguard government investment going forward. In addition, the fiscal rules should enable budgetary policy to be as stable as possible. 

Reform in three stages 

The Bundesbank recommends that fiscal policy and the debt brake should be geared towards current challenges and sound public finances in a targeted and planned manner across three stages:

• In the initial phase, it would be possible to run up large deficits in accordance with the applicable borrowing ceilings. The Bundesbank’s experts recommend, however, that borrowing should focus on the acute additional needs for defence and infrastructure. This phase could extend until 2029. If the scope for borrowing is used in a focused manner, it appears plausible that the general government deficit would rise to around 4 % of GDP.
• In a subsequent transitional phase, the deficits would be gradually scaled back, as required by the EU rules, in order to restore a sound budgetary position. To this end, defence spending would be gradually financed to a decreasing extent by borrowing and to an increasing extent by current revenue. The Infrastructure and Climate Neutrality Fund would be able to continue to finance expenditure of almost 1 % of GDP via borrowing. This phase could run from 2030 to 2035. During this phase, the general government deficit would be reduced towards 1 % of GDP.
• In the target zone, a reformed debt brake would safeguard sound public finances. At the same time, it would stabilise the scope for investment borrowing after the end of the Infrastructure and Climate Neutrality Fund. This target zone is largely consistent with the reform proposals presented by the Bundesbank at the beginning of 2025. It would encourage investment and establish guardrails for stability-oriented fiscal policy. In addition to an authorisation for borrowing for additional investment of 0.8 % of GDP, the proposal comprises scope for non-earmarked central and state government borrowing: if the debt ratio is above 60 %, they are each granted structural scope for borrowing of 0.1 % of GDP; if the debt ratio is below 60 %, they can each borrow 0.35 % of GDP. Other aspects of the reform proposals facilitate steady fiscal policy, amongst other things.