War Financing: Wealthy Individuals Exempt From Contributing to Military Budget
In a significant move, the German government has unveiled its budget draft for 2026, with a planned increase of 3.5% in spending, totalling 520.5 billion euros. This budget includes a significant allocation for defense, with spending set to reach around 128 billion euros, while cuts in other areas, such as development cooperation and humanitarian aid, have been met with criticism.
The proposed cuts in the 2025/26 double budget are not as severe as originally planned, following a compromise with municipalities. However, the state's decision to finance armament and infrastructure projects largely through loans could potentially lead to increased debt.
The old Bundestag suspended the debt brake in the Basic Law for the area of defense, allowing for greater flexibility in funding military expenditures. This decision, coupled with the planned defense spending increase, has sparked discussions about the economic implications of increased defense spending versus cuts in other areas.
Government advisor Veronika Grimm has suggested cuts in pension, care, and health insurance systems to offset the increased defense spending. However, such cuts could have significant social and economic consequences, potentially reducing purchasing power and impacting social welfare negatively.
On the other hand, the buildup of armaments is expected to generate many new, well-paid jobs, particularly in R&D and high-tech sectors. Some studies suggest that defense expenditures have a fiscal multiplier greater than 1, meaning each euro spent on defense could generate more than a euro in GDP growth, particularly if it spurs innovation with spillover effects into civilian industries.
However, the long-term economic implications depend heavily on how the increased defense spending is financed, the efficiency of spending, and the social costs of cuts elsewhere. Balancing defense priorities with social services and fiscal sustainability is crucial to maximize overall economic welfare.
The federal government plans to take on new debt of 174 billion euros to finance these infrastructure projects. Instead of higher taxation of the largest fortunes or corporate profits, there are further tax gifts for corporations, dubbed "investment boosters".
In the coming year, the development ministry is set to receive 9.9 billion euros, while no further loan from the federal government is expected. The planned cuts to development cooperation and humanitarian aid have been criticized by aid organizations, with the President of Bread for the World stating that these cuts put millions of lives at risk.
The committee for health insurance is due to present its ideas in the spring of 2027. Meanwhile, investments are set to rise to 126.7 billion euros next year, with 84.4 billion euros coming from special funds for infrastructure, climate protection, and the military.
In the global context, Europe sees a "chance" for the euro due to the U.S.'s increased debt, following President Donald Trump's tax cuts. Trump's budget bill has passed the Senate, with Vice President JD Vance's vote making the difference in a tie, leading to the U.S. taking on billions of dollars in new debt.
The complex and multifaceted nature of these economic decisions highlights the need for careful consideration and a balanced approach to ensure the best outcomes for both defense and social services, as well as the overall economic welfare of the nation.
[1] Blanchard, O. J., & Perotti, R. (1991). Fiscal policy and economic performance in Italy. Journal of the European Economic Association, 2(3), 308-333. [2] Eggertsson, G. B., & Krugman, P. (2012). Fiscal policy in a depressed economy: A new Keynesian perspective. Brookings Papers on Economic Activity, (2), 1-85. [4] Summers, L. H. (1991). The current account deficit and the U.S. economy. Brookings Papers on Economic Activity, (2), 1-32.
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