Only Half of German Armed Forces Special Fund Usable – Two-Percent Target under Threat in the Medium Term

“To keep spending at 2 percent of economic output over the medium term, there would have to be a noticeable increase to the core defense budget. This would mark a real turning point, one with a monetary safeguard,” says ifo researcher Florian Dorn. Instead, the opposite is happening. Adjusted for inflation, the defense spending in the core budget has been getting smaller since 2022. This means that in 2023, Germany will fall short of the 2 percent target, leaving it with the largest absolute deficit among the NATO countries. Planned investments are being shifted to the special fund. As recently as 2022, the defense budget had earmarked EUR 10 billion for new equipment. For 2024, that amount has dropped below EUR 3 billion. 

Cuts to the core defense budget give other ministries more room for maneuver. “The resoruces allocated to the special fund for the German Armed Forces are shifted  within the budget and thus indirectly circumvent the debt brake – including for some expenditures that are beyond the scope of the fund itself.” Dorn says. When the special fund runs out, Germany’s next government will have an even bigger spending gap to close. For 2026 to 2029, the average annual shortfall to the 2 percent target lies at EUR 25 billion. In addition, there is the interest burden of approximately EUR 3 billion annually resulting from the EUR 100 billion debt increase. “The current budget plans cast doubt on whether Germany really intends to fulfill the 2 percent target in the medium-term. This makes it difficult for its Armed Forces and the defense industry to plan ahead,” Schlepper says.