Germany’s budget deficit will be bigger than that of Spain this year, as a seismic reshaping of Europe’s economic landscape gathers pace.

European Commission (EC) forecasts released on Monday suggest Spain’s budget deficit will narrow to 2.5pc of gross domestic product (GDP) this year, while Germany’s will expand to 3.1pc.

This means it will be the first time since 2008 that Germany’s budget black hole has outstripped Spain’s.

Spain is even on course to rein in the Netherlands next year, which prides itself on its tight purse strings. The EC’s autumn forecast says the Spanish budget deficit will be 2.1pc of GDP in 2026, while the Dutch will clock up 2.7pc.

The key to Spain’s success has been its fast-growing economy and rising tax revenues, juiced up by a tourism boom and an open-door immigration policy.

This means bond markets will now lend money to socialist prime minister Pedro Sánchez’s government at lower interest rates than those paid by France or Italy, barely a decade after Spain emerged from a painful debt crisis.

Germany, meanwhile, is preparing to ramp up infrastructure spending by €500bn (£440bn) in the coming years and potentially the same again on defence.

Earlier this year, Chancellor Friedrich Merz persuaded his parliament to exclude this stimulus package from strict limits on public debt.

The EC expects Germany’s budget deficit to peak at 4pc of GDP next year before easing to 3.8pc in 2027.

Germany’s stock of government debt is still one of the smallest in Europe, keeping its borrowing costs low. The debt-to-GDP ratio will climb from 63.5pc this year to 67pc in 2027, still well below the 100pc-plus rates in France, Italy and Spain.

But Spain is nibbling away at its debt pile.

The Spanish debt-to-GDP ratio was 103pc in September, a percentage point lower than a year before, according to the country’s central bank. The EC predicts Madrid will get this down to 97pc by 2027.

France’s debt-to-GDP ratio will climb from 116pc this year to 120pc in two years, the EC expects, while Italy’s will inch from 136pc to 137pc.

Spain’s tax revenue grew 10pc in September from a year earlier, according to official figures, as receipts from income tax, company tax and VAT all grew in line with an economy expanding at 2.8pc a year.

The EC forecasts Spanish economic growth to remain above 2pc for at least the next two years. By contrast, Italy will grow at less than 1pc a year and France’s economy will gradually pick up to 1.1pc by 2027.

The EC forecasts German economic growth of just 0.2pc this year, followed by 1.2pc in each of the following years as the additional infrastructure and military spending kick in.

But doubts have emerged over whether Mr Merz’s government will funnel all the extra cash into projects that boost growth, or whether some will be spent on everyday budget needs such as healthcare and pensions.

“The more spending is channelled into investment that helps boost the German economy’s resilience, productivity and competitiveness, the greater the long-term impact of the fiscal package would be on the economy and financial stability,” Germany’s central bank said in a recent report.

“However, a considerable amount of the new borrowing potential will be used to allow spending on things other than investment in defence capabilities and infrastructure.”

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