Germany’s budgets are governed by top-down and multi-year budgeting (OECD,
2014b). They are bound by a structural general government deficit limit of 0.5% agreed with
the European Union. According to national constitutional rules, a structural deficit limit
applies to the federal government and, from 2020 onwards, balanced budget rules will
apply to Länder governments.
Strong budget balances in recent years, in part reflecting low interest rates on
government debt, and the sale of financial assets acquired from banks during the global
financial crisis have reduced government debt to 71% of GDP.
However, without reforms to
the pension system, public pension expenditure is projected to increase by at least 21⁄2 per
cent of GDP between 2013 and 2060 (Federal Ministry of Finance, 2016), which would
weaken the sustainability of government finances. Indexing the pensionable age to life
expectancy would improve the sustainability of government finances.