ifo Institute Warns of Significant Price Hikes for German Infrastructure Projects

ifo Institute Highlights Risk of Soaring Costs

The ifo Institute has cautioned that infrastructure projects across Germany could become considerably more expensive. The warning, issued on October 22, 2025, points to an expected rise in demand driven by the newly established debt-financed special fund. Oliver Falck, Director of the ifo Center for Innovation Economics and Digital Transformation, emphasized the critical need for efficient fund utilization to prevent resources from 'evaporating due to rising prices'.

Germany's Ambitious Special Fund for Infrastructure and Climate Neutrality

The core of the discussion revolves around the 'Special Fund for Infrastructure and Climate Neutrality', a substantial investment package approved through an amendment to Germany's Basic Law in early 2025. This fund, with a volume of 500 billion euros over a 12-year period, aims to modernize and future-proof the nation's infrastructure while advancing climate neutrality goals by 2045. The credit authorizations for this fund are notably not counted towards the country's constitutional debt brake.

The fund's allocation includes 400 billion euros for the federal government and 100 billion euros for federal states and municipalities. Key target areas for investment span civil protection, transport, digitalization, hospitals, energy infrastructure, education, and research and development.

Concerns Over 'Additionality' and Market Capacity

Despite the significant investment, questions have been raised regarding whether the fund represents truly additional spending or merely a reallocation of existing budget items. An ifo Institute survey of economics professors in Germany indicated that only approximately 47 percent of the debt-financed special fund is expected to finance new investment projects, with a quarter of participants estimating less than 20 percent. Critics suggest that planned spending is being transferred from the federal budget to the special fund, potentially freeing up core budget resources for other areas, such as social spending.

The anticipated price increases are attributed to several factors beyond just increased demand. The construction sector in Germany already faces significant challenges, including existing capacity bottlenecks, lengthy planning and approval processes, and a persistent shortage of skilled labor across the entire investment chain, from planning to construction and operation. Material shortages have also historically contributed to cost pressures.

Call for Institutional Reforms

In response to these challenges, ifo President Clemens Fuest has advocated for institutional reforms beyond simply injecting more money into the system. He suggested exploring models from other countries, such as the Austrian highway company Asfinag, which is financed by toll revenue and possesses its own debt options. Fuest believes such models could create greater planning security for stakeholders and reduce dependence on annual budget debates, thereby ensuring more sustainable infrastructure development in Germany.