EU's biggest economy set to approve austerity budget

This will bring government spending to within Germany's constitutional debt brake, which restricts the federal government deficit to 0.35 percent.

"We need to learn to get by with the revenues that the citizens provide us with," German finance minister Christian Lindner said ahead of the budget proposal on Wednesday (5 July).

After long and difficult negotiations, the three-way coalition cabinet of the SPD, Lindner's Liberals (FPD) and the Greens, is set to approve the draft budget on Wednesday and will go through the parliamentary process, with final budget approval expected in December.

"We need to curb expenditure growth, review subsidies, and strengthen what makes Germany future-proof," said Lindner.

Some significant changes can still be expected, but in its current outline, the budget foresees defence spending hitting a record high at €51.8bn compared to €50bn last year.

However, most extra spending (€19.2bn) will come out of the one-time €100bn 'special pot' announced by chancellor Olaf Scholz last year. This fund falls outside of the annual budget and is exempted from the debt break.

Total military spending is expected to reach the two percent of GDP mark, aligning with Nato commitments.

Competition and austerity?

"We need to strengthen what makes Germany future-proof, such as education, innovation, investments, and growth impulses," said Lindner.

But spending cuts are expected in most of these areas, including education, student loans, child care, parental allowance and scientific research, with the biggest cuts expected in health care. "Not everything popular is financially feasible," said Linder.

The cuts come at a moment when worries about foreign competition is driving the economic debate in Germany. Lindner called for business-friendly taxes to put German businesses in a stronger position.

"The tax burden in Germany is very high compared to international standards," he wrote on Tuesday ahead of the budget talks. "We must reduce burdens to create room for progress and innovation."

But some criticised the budget cuts, saying it would weaken German competitiveness.

"In China and the USA, hundreds of billions are being invested in future investments," the German Trade Union Confederation (DGB) board member Stefan Körzell told the German press. "The debt brake is a brake on the future."

A group of 10 youth organisations also criticised the debt brake for not blocking an increase in climate investments.

"You emphasise that your austerity policies and the debt brake are in the interest of young people," the group representing a million members wrote to the government. "But the debt brake primarily acts as an obstacle to investments. Austerity measures are costing us our future."

However, a recent survey by newspaper Die Zeit suggests support among German economists for a balanced budget is still broad.

Increased investment in research, defence and green technologies are widely prioritised, but 71 percent say this should be covered with spending cuts elsewhere— 33 percent would support higher taxes and only 16 percent the issuance of new debt.