Germany’s pension time bomb, the UK’s difficult budget balancing act and Europe’s data-center dilemma

While the 2025 pension package fulfils key coalition commitments, the proposal to extend the 48% pension level (a worker with average earnings over 45 years receives a pension equal to 48% of their net wage) beyond 2031 has sparked political tensions as it would increase costs and delay structural reforms. However, a full coalition collapse ending in a minority government remains unlikely. Maintaining the pension level would increase social security contributions by +5.2pps by 2031 and a further +6.6pps until 2040. To finance this project, personal income tax would also need to rise from 16.7% today to 17.1% by 2032 and 19.4% by 2040. The combined employee burden would propel Germany to the top of OECD social contribution rates by 2028, close to 51.5% by 2040, cutting real disposable incomes by -5.2% by 2031 and almost -19% by 2040, thereby limiting private or occupational pension savings. Meanwhile, businesses would face rising non-wage labor costs of +11.5pps by 2040 amid stagnant productivity. In fiscal terms, pension spending could reach 14.2% of GDP by 2035, requiring significant state subsidies and thus annual increases in federal tax revenue of +2.1%. This could crowd out investment and weigh on long-term potential growth. Ultimately, the package is likely to be reopened and adjusted to secure support and allow reforms within the 2026 pension commission.

Chancellor Reeves is set to unveil her Autumn budget on 26 November amid increasing political fragility, large fiscal imbalances and close market scrutiny. We expect around GBP30bn of net fiscal tightening – mostly via tax hikes and mostly front-loaded in 2026. The Chancellor is likely to try to please both Labour MPs and financial markets by unveiling a mix of hikes in both “big” taxes (GBP16.7bn) on large corporates and high-income individuals and “small” ones (GBP8.4bn), namely property and capital income tax hikes. The market reaction should be mildly negative, with volatility potentially spiking in the short term. But if the government bows to political pressure to further increase the tax burden on business, capital or wealth, the market reaction could be much more adverse. Despite further fiscal tightening measures coming in 2026, we do not expect the deficit to narrow much (-5.1% of GDP, from -5.4% of GDP in 2025) because of weakening GDP growth (+0.9% expected after +1.4% this year) and strong public capital spending negating some of the tax-hike-induced savings. Ultimately, strengthened policy credibility – both monetary and fiscal – are essential to significantly improve the UK’s economic and market performance.