James Jackson, Yahoo News

The German welfare state is no longer financially sustainable, Friedrich Merz said on Saturday.

The chancellor argued for a fundamental reassessment of the benefits system as spending continues to soar past last year’s record of €47bn (£40bn).

In a state-level party conference meeting on Saturday, Mr Merz said: “The welfare state as we have it today can no longer be financed with what we can economically afford.”

Once the export champion of Europe, Germany’s economy has slowed dramatically since 2017, with GDP growing by only 1.6 per cent since then versus 9.5 per cent for the rest of the eurozone.

Germany’s economy shrank by 0.2 per cent last year following a 0.3 per cent dip in 2023 – the first time since the early 2000s the economy has retreated two years in a row.

Industrial production fell under the Left-leaning “traffic light” coalition of Olaf Scholz and continues to slide under the new government, with GDP declining by 0.3 per cent in the second quarter of 2025.

Meanwhile, spending on social welfare has exploded, and is set to increase further this year as Germany’s population ages and unemployment rises. Although the majority of benefit recipients are German, large numbers are non-German citizens.

The grim warning from the German chancellor will fuel concerns about the parlous state of Britain’s finances. Despite Mr Merz’s concerns, Germany’s financial problems pale in comparison to the UK.

At 62.5 per cent, Germany’s debt as a percentage of gross domestic product (GDP) is one of the lowest in the eurozone and far below the UK’s at 96.3 per cent.

Higher welfare spending, especially on disability benefits in Britain, has helped make the UK’s debt-to-GDP the fifth highest in the developed world.

In the UK, welfare spending costs about 10.8 per cent of GDP, with welfare payments at £326bn this year rising to £373bn over the next five years. Pensions are the biggest factor – predicted to rise from £159bn this year to £182bn by 2030.

State pensions in the UK are far lower than in Germany and account for about 5.1 per cent of GDP. In Germany, by contrast, state pensions alone account for about 12 per cent of GDP, according to Eurostat. Benefits for families and children added a further 3.4 per cent.

However, the UK has a higher disability benefit bill, which cost £36bn in 2023-24 but which is set to hit £56bn in 2029-30. That’s a 56 per cent increase over six years or about 8 per cent a year – far in excess of inflation.

Germany has in place a so-called “debt brake”, which limits how much the government can borrow to fund its spending plans.

Mr Merz’s views on the welfare state are likely to provoke discontent among his Social Democratic Party (SDP) coalition partners, whom he relies on for a thin majority in the Bundestag.

The SDP have typically seen themselves as defenders of the welfare state, but Mr Merz, a former corporate lawyer with little governing experience, said he would not be scared away from making necessary reforms by discontent within the party.

The German chancellor added that he was not satisfied with what his government had achieved during its time so far, saying: “Let’s show together that changes and reforms are possible.”

He called on both the SDP and the Christian Democratic Union (CDU) to commit to making tough decisions and to forming a joint “anti-migration and business-friendly” coalition path.

Radically curbing migration is one key policy area where the coalition is in agreement. Both parties have called for Germany to increase its ability to detain migrants pending deportation and to expand a list of safe countries that migrants could be returned to.

This stronger migration stance follows a new study by the German Economic Institute that listed migration as a “watershed” moment in the decline of German school performance after 2015.

The coalition’s more hard-line approach on migration has also aligned with an uptick in support for the far-Right Alternative for Germany (AfD) party.

The AfD are now polling level with Mr Merz’s CDU among voters, while a survey by the INSA institute found that 59 per cent of voters were unhappy with the chancellor’s performance in his first 100 days in office. His performance among voters is notably worse than that of Mr Scholz, who was removed from office in February after the SPD’s worst result in modern history.

Lars Klingbeil, the SPD leader and vice-chancellor, hit back at Mr Merz’s announcement with calls for increased taxation on top earners.

He called for a summit focused on helping industry leaders respond or adapt to US tariffs and said “no option is off the table” when it comes to plugging the 30-billion-euro gap in Germany’s budget.