The federal government will face significantly higher interest expenditure in the coming years. This year, the figure is 30.2 billion euros. By 2029, interest expenditure in the federal budget, including special funds, will rise to 61.9 billion euros. The share of federal expenditure will almost double from 6% to just under 11%. This is due to the increasing new debt in the core budget, the additional loans from the special funds and the unlimited defence spending. Interest is taking up more space in the federal budget.

At the same time, the federal government is switching to a new method for calculating interest expenditure in 2025. In future, it will be distributed over the term of the securities in the budget on an accrual basis. Academics and the Bundesbank have been calling for this for a long time. The ability to plan interest expenditure will become more precise - but the buffers in the budget will also become smaller. The Finance Minister will have less room for manoeuvre in implementing the budget.

One phenomenon in recent years has been oversized planned interest expenditure. The budget often benefited from the fact that fewer funds were required at the end of the year than had been budgeted for. Previous finance ministers were thus able to offset additional expenditure elsewhere in the overall accounts without having to increase net borrowing and ask parliament for a supplementary budget.

To date, the federal government has needed these high buffers in interest expenditure in order to make provisions in the budget for premiums and discounts on the issue of federal securities in view of market developments. In future, this will be easier because the premium or discount will be distributed over the term of the securities on an accrual basis. This is provided for in the Budget Act 2025 by Federal Finance Minister Lars Klingbeil (SPD), which will be on the Bundestag's agenda for its first reading next week. In the past, however, the federal government had recognised premiums - which are the proceeds above the nominal value of 100 - or discounts - which are the discount on the nominal value - in full at the time of sale. This amount was therefore recognised in the income statement for the year in question.

Premiums and discounts result primarily from the increase in German government bonds. In order to ensure the liquidity of German government bonds with maturities of one, two, seven, ten, fifteen or thirty years, the federal government regularly tops up its bonds, but retains the previously fixed coupon. Premiums or discounts reflect the difference between the fixed coupon and the market yield.

The methodological changeover was already planned before the change of government to black-red. The accrual-based distribution of premiums and discounts is the right approach from an economic perspective. The federal government is thus also following the petition of experts. These include the Bundesbank. However, the independent Scientific Advisory Board at the Federal Ministry of Finance also urged a reform of the premium and discount rules in an expert opinion back in October 2021. Four years ago, in the middle of the coronavirus crisis, the federal government had negative bond interest rates and particularly high premium income. In 2021, interest expenditure supposedly fell to its lowest level for years at 3.8 billion euros, after peaking at around ten times this amount. However, interest expenses actually totalled 14.9 billion euros in 2021 and were only visually reduced to this low amount by netting out the premium income of 11.1 billion euros.

The scientists argued in favour of a reform of accounting, primarily for reasons of fiscal discipline. They stated that premium income is difficult to plan. If they were not recognised in the federal budget - and also in the budgets of the federal states - on an accrual basis, „the impression of additional spending leeway may arise“, the Council warned. The burden would be shifted to later years. Conversely, this could lead to accounting burdens in the budget if discounts arise when interest rates rise. This could „become more significant in the future“, the experts wrote in wise foresight.

This is exactly what happened in 2023, when the federal government had to accept a discount with the turnaround in interest rates. The interest expenditure item jumped to 39.2 billion euros. However, this included an additional discount of 17.6 billion euros. The actual interest expenditure was only 21.6 billion euros. However, the effect was a burden on the government: the funds for the discount were missing elsewhere in the budget. They made budget planning more difficult for the coalition government and Federal Finance Minister Christian Lindner (FDP).

The federal government rightly praises the advantages of accrual accounting in the monthly report of February 2025. According to the federal government, the changeover also allows for more precise planning of interest expenditure. As a result, the planning buffers will be systematically lower in future. The burden of interest expenditure in future years will depend primarily on the yield level and no longer on the selection of specific securities for borrowing.

However, the political calculation is also obvious: in times when the premium created more room for manoeuvre in the federal budget, no finance minister, regardless of political colour, showed any ambition to change the accounting method. This applies to the term of office of Wolfgang Schäuble (CDU) until 2017 and also to that of Olaf Scholz (SPD) until 2021. The fact that this shifted burdens into the future was deliberately neglected by the heads of department. With the turnaround in interest rates, the new calculation now creates more room for manoeuvre in the federal budget compared to the previous methodology. This is certainly incentive enough for the new minister to press ahead with the changeover - but it does not make it any less appropriate.

The changeover also has a side effect: the reported interest item will initially fall this year, even though the SPD has more than doubled borrowing to 82 billion euros. The interest item will only increase again in subsequent years. While 37.5 billion euros in interest expenditure including special funds was still planned for 2024, this figure will only be 30.2 billion euros in 2025. This is due to the accrual-based distribution. The interest item will then rise again: to 30.3 billion euros (2026), 39.8 billion euros (2027), 52.5 billion euros (2028) and finally 61.9 billion euros (2029).