Infrastructure investment gap
Timely disbursement of EUR 500BN Infrastructure Special Fund through 2035 is important for the development trajectory of Germany. To ensure additionalness, the core budget will require to maintain investment levels. Planned investment mainly targets high-effects in road, rail and digital infrastructure, which must address the most important requirements to narrow the existing investment differences.
If well executed, these investment can increase Germany’s growth capacity by 1%. Before announcing the special fund, Scope estimated that the possible growth would decline by about 0.7% by the end of this decade. Nevertheless, the execution risk is high, as many projects need to be completed in a short time. It can increase the plan and manufacturing capacity, but can also cause high inflation. According to the government’s goal, investment is also required to increase the country’s development capacity above 1%.
Germany aims to meet the revised NATO target with indefinite growth effects by 2029
The government has greatly increased its ambitions for defense spending. The plan to spend under the definition of NATO has increased from 2.1% to 2.4% this year in 2024 and then a trend of 3.5% by 2029, which is six years before the agreed schedule ((Figure 3As the employed growth is most affected by Germany in the European Union member states when seen relative to the revenue of the Central Government, the German government improved loan brakes for more than 1% of GDP for defense spending.
But the development effects associated with high defense spending are likely to be moderate, although it is somewhat uncertain at this stage. The Kail Institute estimates that fiscal multiples for defense spending are only around 0.5x, depending on what extent is purchased domesticly, and how quickly the production capacity can be increased.
Figure 3: Germany plans to meet the revised NATO target of 3.5% of GDP by 2029.
NATO defense spending, % of GDP
