Germany’s turning point for infrastructure and defense funding

On Tuesday, 18 March 2025, the German Parliament (“Bundestag”) passed a historic bill introduced by the CDU/CSU and SPD parliamentary groups to amend the German Constitution (“Grundgesetz”) for boosting infrastructure and defense spending in the years to come (“infrastructure and defense package”).

The approval of the Federal Council (“Bundesrat”) has been granted today, paving the way for a turning point on infrastructure and defense funding in Germany over the next decade.

 

Approved Reforms

Exception of Germany’s debt break for defense spending

A key principle of Germany’s fiscal policy, the so called “Schuldenbremse” (debt brake) limits new borrowing by the federal government to 0.35% of the annual GDP. The debt brake’s intention is to ensure financial stability. On the downside, it does limit public investment, in times of need.

The amendment to the German Constitution exempts defense spending above 1% of GDP (including civil defense and civil protection, intelligence services, as well as cyber security) from the debt break. In fact, this enables the federal government to unlimited borrowing for defense spending.

EUR500 billion special fund for public infrastructure funding

The infrastructure and defense package will establish a special fund (“Sondervermögen”) in the amount of EUR500 billion, dedicated to public infrastructure funding (“special funding”).

EUR100 billion from this special fund will be allocated to the existing Climate and Transformation Fund - a fund which has been set up in 2024 to provide funding for the German industry’s energy transition (e.g. promoting the development of a hydrogen economy or the EV industry by supporting battery cell production). Another EUR100 billion will be distributed among the federal states for infrastructure funding on the municipal and state level.

The special fund shall especially invest in the following key areas:

• Transport infrastructure: A large proportion of the funds will be invested in the modernization and expansion of the country’s road and rail network. Deutsche Bahn alone is to receive around EUR150 billion to improve its infrastructure and strengthen local public transport.
• Educational facilities: Schools and universities shall be comprehensively refurbished and modernized. This includes both structural measures and equipping them with modern technology.
• Energy and climate protection measures: A significant proportion of the funds will be used for projects to promote renewable energies and improve energy efficiency. This also includes measures to reduce CO2 emissions.
• Digitalization: Investments in digital infrastructure, including the expansion of broadband and the improvement of IT infrastructure in public institutions, are also planned.
• Housing construction: Funds shall be made available to promote the development and construction of affordable residential real estate assets and energy-efficient refurbishment of existing residential assets.

Investments under the special fund shall be made within a period of twelve years. The funding shall be additional funding to the general annual budget of the federal government. The specifics of the funding and the respective programs shall be decided by the new government, which is not in office yet.

Limited public borrowing for Federal States in Germany

The 16 federal states in Germany have been barred from incurring structural deficits in their budgets. The infrastructure and defense budget provides that the regional governments may be permitted to borrow up to 0.35% of their GDP annually, which provides for more flexibility and investment capital of the federal states. It is expected that funding of infrastructure projects by municipalities and the federal states will likewise increase in the future.

 

Outlook

Significant growth expected

The easing of the debt brake (“Schuldenbremse”) and the provision of the special fund (“Sondervermögen”) give rise to expectations of an upturn for the German economy, and particularly the entire infrastructure, real estate and defense sector. Sub-sectors to the infrastructure and defense, in particular construction, transport and energy transition sectors, are anticipated to experience a significant growth in the mid and long term.

According to a study carried out by DIW Berlin (German Institute for Economic Research) the GDP of Germany is expected to rise between 0.7 % and 1.5 % annually over the next ten years solely due to this infrastructure and defense package.

Additional structural reforms on the way

However, there is common ground that in addition to the new funding, structural reforms are required to leverage from the funding boost. Especially reducing bureaucracy, simplifying procurement and permitting procedures as well as shortening processing times in these areas will be required – and it is the clear intention to fulfil these additional required reforms by the government-to-be between the German Conservative Party (CDU) and the social-democratic party (SPD).

More attractive and investor friendly environment expected

In any case, volume and scope of this infrastructure and defense package is historic. With the additional structural reforms underway, it is expected that the general environment for private investments in the infrastructure sector in Germany will become notably more attractive. The latter expected to lead to a significant increase of private investments in the economy and especially the infrastructure, defense and energy sectors.