Germany's Chancellor Friedrich Merz speaks to members of the media, during arrival for an informal summit at the Danish Parliament at Christiansborg Castle in Copenhagen, Denmark, October 1, 2025. Ritzau Scanpix/Thomas Traasdahl via REUTERS

By Maria Martinez

BERLIN (Reuters) -Germany is using some of the financial firepower created by its taboo-busting fiscal reforms to prop up day-to-day spending rather than directing it all towards additional infrastructure to make the country fitter for the future.

Chancellor Friedrich Merz's reform of Germany's debt brake and the creation of a huge off-budget infrastructure fund were billed as unleashing hundreds of billions of euros of investment to revitalise the economy and boost its military.

A Germany spending rule mandates that 10% of the core budget should be for long-term investment and any projects financed by the infrastructure fund were supposed to be on top of that.

However, scrutiny of the 2025 budget conducted by think tanks and opposition parties, and corroborated by Reuters' own analysis of the proposals, shows this is not the case when compared to the budget drafted by Merz's predecessors.

ACCOUNTING SHIFTS FREE UP FISCAL ROOM

While total investment is indeed set to rise - by a quarter between 2024 and 2026 - some of the already-earmarked investment from the core budget has been shifted into the infrastructure fund, finance ministry documents show.

This frees up budget leeway for spending commitments made in the coalition deal that paired Merz's centre-right party with the centre-left SPD, but could slow the process of fixing Germany's creaking infrastructure.

Thus, while 27.2 billion euros in new investments will be made from the infrastructure fund, investments made out of the core budget fall to 62.7 billion euros from the 81 billion euros set aside in the 2025 budget drafted by the previous government.

In addition, further investments made from an existing fund for climate transition fall by 1.2 billion euros, making the net gain in investments just 7.7 billion euros.

"This year, hardly any more will be invested than former finance minister Christian Lindner had already planned without a special fund," said Christian Goerke, the Left party's parliamentary group spokesperson on fiscal policy.

Asked to comment, the finance ministry said the new 2025 core budget still meets the requirement for a 10% investment target and noted total investment would hit a record 115 billion euros in 2025 and 126.7 billion euros in 2026, well up from 2024's 102.1 billion euros.

An analysis by the Greens says the investment quota was inflated by how the government accounts for defence expenditure.

The finance ministry did not address critics' argument that this shift of funds gives the government more leeway for day-to-day spending rather than improving the economy in the long-term by addressing years of underinvestment - as was intended when the fund was created.

The shift has released 18.3 billion euros from the core 2025 budget for non-investment items in the coalition agreement, such as the expansion of pensions for women who took time off work to have children and a cut VAT in the gastronomy sector.

The use of off-budget accounting has had serious consequences before in Germany: the previous coalition struggled to fix a 60 billion euros hole in its finances after a court tore up its method of employing special funds.

"The shady flavour of creative accounting has entered German fiscal policies," said Carsten Brzeski, global head of macro at ING, warning that this brings back unpleasant memories of the intra-coalition fights of the former government.

He added that it also bears the risk that households and companies will hold back spending and investment decisions.

TRANSFERS FROM THE CORE BUDGET

Some investment areas seen as weak spots in the German economy see little gain, if any.

For the dilapidated railways, the 2025 plan offers 12.4 billion euros in the core budget falling to 2.5 billion in 2026, while infrastructure fund spending on rail rises from 9.2 billion euros this year to 18.7 billion euros in 2026.

Yet even with the additional planned transfer of around half a billion euros from the defence-related part of the budget, total rail investment remains flat at around 22 billion in both years, the Linke party review calculates.

The German Economic Institute (IW) noted the budget manoeuvres give the government additional fiscal room in the core budget for 2026.

The infrastructure fund earmarks 2.5 billion euros in 2026 for the renovation of motorway bridges, while investments for federal trunk roads in the core budget are cut by 1.7 billion compared with 2024, the year used as benchmark for the study as it precedes the creation of the special fund in March of 2025.

According to the Greens' analysis, the government has gained 10 billion euros of fiscal leeway for 2026 through the transport sector alone, citing investment in roads and railways.

For investment in broadband, a crucial need for Germany which trails the internet capability of many of its rich economy peers, an allocation in 2026 of 2.3 billion euros appears in the infrastructure fund, while in 2024 it was still listed in the core budget with 1.8 billion euros, IW said.

"The government is squandering a lot of credibility with this approach," said IW budget expert Tobias Hentze.

(Reporting by Maria Martinez; additional reporting by Holger Hansen; editing by Mark John and Toby Chopra)