Germany disputes Ifo analysis that says it diverted third of defence-designated debt

By Maria Martinez and Cian Muenster

BERLIN, Sept 10 (Reuters) - More than a third of the extra debt taken on by the German government in 2025 under an exemption for defence and security-related spending was used for other purposes, according to an Ifo analysis that was disputed by the finance ministry.

The analysis from the influential Ifo think-tank, published on Thursday, comes after the government has been repeatedly accused of using some of the financial firepower created by its taboo-busting fiscal reforms to prop up day-to-day spending.

Chancellor Friedrich Merz created a huge off-budget infrastructure fund to try to unleash hundreds of billions of euros of investment to revitalise the economy and reformed the constitutional debt brake borrowing rules to boost the military.

The Ifo said government spending covered by the sectoral exemption totalled €54.6 billion ($63.56 billion) in 2024 and rose to €72.2 billion in 2025.

While spending increased by €17.6 billion, additional borrowing under the exemption amounted to €28.6 billion in 2025. According to Ifo, that left €11 billion in extra debt that did not translate into additional defence and security spending, implying what it called a misappropriation rate of 38.5%.

MINISTRY SAYS FINDINGS ARE FLAWED

"The spending leeway that became available in the core budget was used for other purposes,” said Ifo researcher Emilie Hoeslinger.

A spokesperson for the finance ministry said the findings were "legally and methodologically flawed", saying the study ignored the framework approved by parliament and enshrined in the constitution.

The ministry said Ifo used the wrong benchmark, arguing that the relevant threshold under Germany's constitution was defence and security spending above 1% of GDP, rather than spending levels in 2024, adding that the constitutional exemption did not require spending to be additional.

Ifo told Reuters that its analysis was not intended to assess whether the spending complied with constitutional rules, but whether the additional borrowing translated into additional expenditure.

While the Ifo's analysis does not impose any immediate consequences for the government, it raises questions as the ruling coalition defends its draft budget for 2027 in the lower house of parliament.

The far-right AfD, which topped Sunday's election in Saxony-Anhalt, has threatened to seek a constitutional review of the budget by Germany's top court.

“It is clear to me that this potential lack of limits on debt-financed expenditure means the ministry of defence no longer sets priorities, because everything has become possible – at least from a financial perspective," said Sebastian Schaefer, from the opposition Greens party.

($1 = 0.8590 euros)

(Reporting by Maria Martinez and Cian Muenster; Editing by Friederike Heine and Alison Williams)