Germany

THE CURRENT STATE OF DEMOGRAPHICS AND DEBT IN GERMANY

Germany is a pivotal player within the global economy and has long been regarded as an example of strong fiscal discipline. For much of the 21st century, binding fiscal rules helped limit government debt and reinforced institutional credibility. In recent years, however, this fiscal restraint has loosened.  Government debt has risen following a sequence of major global shocks, most notably the COVID-19 crisis and the outbreak of the Russo-Ukrainian war, as policymakers deployed substantial fiscal support to stabilize the economy.  While debt levels still remain lower than in many other advanced economies, Germany has shown greater willingness to rely on discretionary borrowing.  This shift is reflected in policy decisions such as the 2025 modification of the country’s debt brake to allow for increased military spending. 

In terms of demographics, Germany faces aging pressures similar to those confronting many advanced economies. Demographic aging is placing sustained upward pressure on public expenditures, particularly for pensions and healthcare. The nation has increased immigration to help offset labor market decline, but demographic headwinds remain significant and are projected to intensify over the coming decades. As potential growth slows and age-related spending rises, Germany increasingly confronts the same long-term fiscal challenges observed in other aging advanced economies. Germany therefore represents a compelling case study for examining how demographic-driven structural debt pressures interact with strong institutions and a tradition of fiscal resilience. 

MODEL EVALUATION

To determine the predictive accuracy of each model, a robustness test was conducted. All models were trained exclusively on data through 2013, and then tasked with forecasting German government debt levels from 2014 to 2023 using the actual demographic changes that occurred during those years. These predictions were then compared to the actual 2023 debt level. 

The results indicate that several specifications perform well out of sample. The OECD Member model produced the lowest forecast error, followed closely by the High Immigration, EU Member, and Strong Democracies models. These findings suggest that the demographic-debt relationship captured by the models is structurally robust and provides a credible foundation for long-run German debt forecasting. It is important to note that all specifications underpredicted Germany’s 2023 debt level. This outcome is unsurprising, as the models were estimated using data only through 2013 and therefore could not account for major post-2019 shocks, including the COVID-19 pandemic, the Russo-Ukrainian war, and the recent loosening of Germany’s debt brake. Despite these limitations, the models predict Germany’s 2023 debt level with a relatively high degree of accuracy given these unpredictable shocks. 

INTERPRETATION

German public debt is projected to rise significantly over the coming decades, reflecting the country’s rapid pace of demographic aging. Across all model specifications, German debt levels exceed 110 percent of GDP by 2050. While such levels are not unprecedented by modern standards, they suggest that even fiscally conservative economies can experience permanent increases in their steady-state debt levels as a result of structural demographic forces. These results are particularly noteworthy given that the earlier pseudo out-of-sample tests underpredicted Germany’s recent debt accumulation, yet the same model specification, when projected forward using recent data, implies accelerated debt growth, especially during the 2030s, when German population aging intensifies. 

These forecasts assume the absence of future crises comparable to a financial crash, pandemic, or major war. Additional shocks could therefore push debt levels higher. Germany’s strong institutions, credible fiscal framework, and ability to attract immigration are important national characteristics that help moderate the fiscal impact of aging, but they are unlikely to fully offset it.  Germany therefore demonstrates how demographically driven debt pressures can accumulate even in economies with strong institutional foundations, underscoring the long-run fiscal challenges facing aging advanced economies. Without major policy adjustments, stabilizing debt levels over the long run is likely to become increasingly difficult as demographic aging accelerates.