German Stability Programme 2019 - Bundesfinanzministerium
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German Stability Programme 2019
German Stability Programme 2019
Page 2
Contents Page 3
Contents
Page
Preface to the German Stability Programme for 2019........................................................................... 5
1. Summary...................................................................................................................................................... 6
2. Aggregate economic conditions in Germany...............................................................................11
2.1 Aggregate economic conditions in Germany in 2018..................................................................... 11
2.2 Short- and medium-term outlook for the aggregate economy, 2019–2023......................... 12
3. German fiscal policy in the European context............................................................................17
3.1 The rules of the Stability and Growth Pact and the Fiscal Compact and
their implementation in Germany.......................................................................................................... 17
3.2 Fiscal situation and strategic direction.................................................................................................. 19
3.3 Fiscal policy measures in terms of expenditure and revenue..................................................... 22
3.4 Implementation of country-specific fiscal policy recommendations..................................... 28
4. General government budget balance and debt level projection..........................................29
4.1 Trends in general government revenue and expenditure............................................................. 29
4.2 Trends in the government budget balance.......................................................................................... 31
4.3 Trends in the general government structural balance................................................................... 32
4.4 Sensitivity of the budget balance projection....................................................................................... 35
4.5 Trends in debt levels....................................................................................................................................... 36
5. Long-term sustainability and quality of public finances........................................................37
5.1 Challenges to the sustainability of public finances.......................................................................... 37
5.2 Government revenue and expenditure from a long-term perspective.................................. 39
5.3 Measures to ensure long-term fiscal sustainability......................................................................... 40
5.4 Measures to increase the effectiveness and efficiency of public revenues
and spending..................................................................................................................................................... 44Page 4 Tables/Figures
Tables/Figures
Tables
Page
Table 1: Trends in the government revenue ratio......................................................................................... 30
Table 2: Trends in the government expenditure ratio................................................................................ 31
Table 3: Trends in the general government balance.................................................................................... 31
Table 4: Budget balances according to government level......................................................................... 32
Table 5: Structural balance compared with actual balance and GDP trend...................................... 33
Table 6: Expenditure benchmark: projected expenditure and potential output............................ 34
Table 7: Sensitivity of the general government budget balance projection...................................... 35
Table 8: Trends in the debt-to-GDP ratio.......................................................................................................... 36
Table 9: Forecast of macroeconomic trends.................................................................................................... 47
Table 10: Price developments – deflators......................................................................................................... 48
Table 11: Labour market trends............................................................................................................................ 49
Table 12: Sectoral balance........................................................................................................................................ 50
Table 13: General government budgetary prospects................................................................................... 51
Table 14: No-policy change projections............................................................................................................ 53
Table 15: Amounts to be excluded from the expenditure benchmark................................................ 53
Table 16: General government debt developments (Maastricht debt ratio)..................................... 53
Table 17: Cyclical developments........................................................................................................................... 54
Table 18: Divergence from previous update.................................................................................................... 55
Table 19: Long-term trends in age-related general government expenditure................................ 56
Table 20: Technical assumptions.......................................................................................................................... 57
Table 21: Contingent liabilities.............................................................................................................................. 57
Figures
Figure 1: Interest expenditure in public budgets: a historical perspective....................................... 10
Figure 2: Taxes 2010–2023....................................................................................................................................... 10
Figure 3: Factors contributing to real GDP growth in percentage points.......................................... 15
Figure 4: Capacity utilisation in Germany....................................................................................................... 15
Figure 5: Labour market trends in Germany................................................................................................... 16
Figure 6: Gross domestic product, in real terms............................................................................................ 16
Figure 7: Comparison of structural and actual fiscal balance (in % of GDP).................................... 18
Figure 8: Change in the Federation’s structural deficit (in % of GDP)................................................. 21
Figure 9: General government revenue and expenditure structure 2018.......................................... 27
Figure 10: Trend in German potential output, 2010–2023........................................................................ 38
Figure 11: Federal transfers to the statutory health insurance system............................................... 43German Stability Programme 2019 Page 5
Preface to the German Stability Programme for 2019
The member states of the European Union The projections of budgetary trends con-
submit their medium-term fiscal plans to tained in the Stability Programme are based
the European Commission and to the Eco- on all the information available at the time
nomic and Financial Affairs Council (ECO- of publication, especially the federal gov-
FIN) by the end of April each year. To this ernment’s annual projection on macroe-
end, in order to comply with the rules of the conomic trends of 30 January 2019 and the
Stability and Growth Pact, member states of results of the Working Party on Tax Reve-
the euro area submit updated Stability Pro- nue Estimates of 25 October 2018, subse-
grammes, while all other EU member states quently updated to take account of the fed-
submit updated Convergence Programmes. eral government’s annual projection. The
This update of the German Stability Pro- federal government’s recent spring projec-
gramme was approved by the federal cab- tion on macroeconomic trends in Germa-
inet on 17 April 2019. The programme fol- ny, which was published on 17 April 2019,
lows the Guidelines on the format and the same day as this Stability Programme, is
content of Stability and Convergence Pro- not yet included in Chapter 2 or the corre-
grammes (Code of Conduct). The feder- sponding tables. It will form the basis of the
al government submits each update of the results of the Working Party on Tax Revenue
German Stability Programme to the com- Estimates that are to be published in early
petent expert committees of the German May 2019.
Bundestag as well as to the Finance Minister The Federal Ministry of Finance publish-
Conference (Finanzministerkonferenz) and es the updated Stability Programme along
the Stability Council (Stabilitätsrat). After re- with the programmes for preceding years
view by the ECOFIN Council, the Council’s online at:
opinion on the Stability Programme is also https://www.bundesfinanzministerium.
forwarded to these bodies. de/Web/EN/Home/home.html
By submitting this updated Stabili- The programmes of all EU member
ty Programme, which contains projections states as well as the corresponding Europe-
of budgetary trends at all government lev- an Commission analyses and ECOFIN rec-
els (Federation, Länder, local authorities and ommendations are published on the Euro-
social security funds), the federal govern- pean Commission’s website at:
ment is complying in full with its obligation h t t p : //e c . e u r o p a . e u / i n f o / b u s i n e s s -
for the year 2019 to submit national medi- economy-euro/economic-and-fiscal-pol-
um-term fiscal plans in accordance with Ar- icy-coordination/eu-economic-govern-
ticle 4 of Regulation (EU) No 473/2013 on ance-monitoring-prevention-correction/
the provisions for monitoring and assessing s t a b i l i t y - a n d - g r o w t h - p a c t /s t a b i l i -
draft budgetary plans. ty-and-convergence-programmes_enPage 6 Summary
1. Summary
The German government has set itself the Overall, Germany achieved a general
goals of enhancing the German econo- government surplus of 1.7% of GDP in 2018.
my’s growth drivers and future viability, The various government levels (Federation,
strengthening social cohesion and ensuring Länder, local authorities and social security
that public finances are sound. The govern- funds) all contributed about equally to this
ment’s fiscal policies are a systematic reflec- surplus. General government debt in 2018
tion of these objectives. fell by 3.6 percentage points, to 60.9% of
With real GDP growth of 1.4% in 2018, GDP. In 2018, Germany thus complied in full
Germany’s economic upswing continued with the rules of the Stability and Growth
for the ninth year in a row. However, the Pact and the Fiscal Compact.
momentum slowed significantly, not least When analysing Germany’s high surplus,
as a result of a bleaker global economic out- it is worth keeping in mind that it took con-
look, which is partly driven by uncertainties siderable time to form a new coalition gov-
associated with international trade policy ernment at the federal level. As a result, the
and the United Kingdom’s withdrawal from 2018 Federal Budget Act (Bundeshaushalts-
the European Union. The transition to new gesetz) was not adopted by the Bundestag
EU emissions testing standards caused sub- until June. Until then, an interim budget was
stantial delivery delays in car manufactur- in place at the federal level, meaning that no
ing, which is a key industry. new measures could be carried out unless
Despite this, fiscal policy conditions re- they were unavoidable on grounds of neces-
main favourable. The German labour mar- sity or urgency. For this reason, almost all of
ket is still strong, with average employment the measures on the expenditure and rev-
reaching a new record high of more than enue side that were decided on by the fed-
44.8m in 2018. Wages and salaries rose sig- eral government in its coalition agreement
nificantly. Public finances benefited from will not have a financial impact until 2019
higher tax revenues combined with lower or even later.
interest spending. In 2018, interest spend-
ing by the German public sector decreased
to just 0.9% of GDP, the lowest level seen in
50 years (see Figure 1).German Stability Programme 2019 Page 7
These measures are set out in detail in centives for labour market participation. Tax
the 2019 Federal Budget Act and the bench- relief measures include (a) efforts to com-
mark figures decision for the 2020 federal pensate for bracket creep by increasing ba-
budget and the following years until 2023. sic personal allowances and raising tax rate
For example, the federal government plans thresholds, (b) significant increases in fam-
to make use of fiscal policy leeway to con- ily benefits, including child benefit, (c) low-
tinue to increase public investment in in- er social security contributions for low-in-
frastructure, education and research. This is come earners, (d) the reintroduction of the
one of the reasons why the German Bunde- rule requiring employers and employees to
stag and Bundesrat adopted a constitutional pay equal contributions to statutory health
amendment that will allow the federal gov- insurance and (e) a reduction in the unem-
ernment to provide direct support to Länder ployment insurance contribution rate. In
and local authorities to assist them in fund- addition, it has been agreed that, starting in
ing schools, public transport and (as was al- 2021, the solidarity surcharge will be elim-
ready the case in the past) the construction inated for roughly 90% of income tax pay-
of social housing, among other things (see ers previously subject to it. The government
page 23 for details). also plans to introduce tax incentives for re-
The Länder and local authorities face key search that will provide targeted relief for
challenges in terms of identifying suitable companies and make the tax system more
investment projects, navigating the relevant investment-friendly. In total, the volume
planning and tendering rules when imple- of the tax measures planned for 2019–2021
menting them, and managing the commer- will significantly exceed €25bn per year
cial commissioning process. The federal once they have taken full effect. According
government is passing on significant finan- to current forecasts, the implementation of
cial resources to the Länder to ensure that these measures will help to reduce the tax
the existing fiscal space can also be used at ratio, which has risen to a record 23.7% of
the Länder and local authority level in the GDP, back to its initial level over the course
coming years. In this way, the federal gov- of the current legislative term.
ernment is solidifying its efforts to strength- One of the main aims pursued by the
en the foundations for future growth by in- German government in its fiscal policies is
vesting in education and infrastructure. Last to strengthen social cohesion to ensure that
year, general government investment in- the favourable economic situation benefits
creased by 7.6% to a record €78.9bn. It grew the entire population. To this end, the gov-
at a significantly higher rate than nomi- ernment has adopted far-reaching meas-
nal GDP, a trend that will continue under ures, including labour-cost subsidies to help
the fiscal policy approach pursued by the the long-term unemployed enter the labour
government. market, more affordable pre-school child-
The excellent situation on the labour care and a better range of childcare options
market, with steady growth in employment starting at the beginning of 2019, an in-
and wages, has contributed to rising tax re- creased child supplement for low-income
ceipts in recent years. The federal govern- families starting in mid-2019, and finan-
ment has launched important measures for cial assistance for the construction of social
growth-friendly and socially equitable tax housing. In addition, child benefit and the
policy. Lower taxes and social security con- tax-free child allowance will be increased
tributions, especially for families and low- considerably starting in 2021.
er- and middle-income earners, are boosting
disposable incomes and creating positive in-Page 8 Summary
In 2019, Germany plans to take fiscal From this point of view, continuing to
policy measures that will result in additional consolidate public budgets remains an im-
spending in the amount of 0.5% of GDP and portant prerequisite for maintaining Ger-
reduced revenue in the amount of 0.2% of many’s ability to act in the face of multiple
GDP. German fiscal policy will be distinctly emerging challenges and responsibilities.
expansionary in 2019. Despite the fact that These include the financing of climate pro-
economic growth has recently slowed, the tection measures and the associated phas-
German economy is still running at slight- ing-out of coal mining and the production
ly excess capacity. This is particularly true of electricity from coal, as was recently rec-
of certain industry sectors, including con- ommended by an expert commission; the
struction, IT services and care services, areas assumption of responsibility at the interna-
in which there is a shortage of skilled work- tional level with regard to security and de-
ers. Overall, it seems appropriate to pursue velopment cooperation; and Germany’s fu-
fiscal policies that help to improve the Ger- ture financial contributions to the European
man economy’s growth potential in a struc- Union budget.
tural way whilst following an expansion- In addition, the challenges of demo-
ary approach in order to counteract external graphic change will start affecting German
risks to the economy and the resulting neg- society very soon. The baby boomer gener-
ative developments. ation is about to start reaching retirement
Given the recent weakening of the econ- age, as a result of which the ratio of the re-
omy, it is necessary to prepare for more dif- tirement-age population to the working-age
ficult fiscal policy conditions. The debt population will increase from approxi-
brake stipulates that the Länder must mately 33% in 2018 to nearly 44% in 2030.
achieve balanced budgets without net bor- The consequences of this trend will put fis-
rowing starting in 2020. The constitution- cal policy to the test. At the same time, pol-
al upper limit for structural net borrowing icy-makers face the challenge of ensuring
(i.e. borrowing adjusted for cyclical effects that social security systems remain accept-
and one-off measures) in the federal budget able and reliable for benefit recipients and
is 0.35% of GDP. contributors alike. In the area of statuto-
The German government is planning ry pension insurance, legislators have com-
to continue with balanced budgets with no mitted to taking steps by 2025 to stabilise
new borrowing until the end of the financial benefit levels and limit contribution rates
planning period in 2023, thereby ensuring with the help of federal subsidies if neces-
that the constitutional debt rules are com- sary. Moreover, the pension entitlements of
plied with. Based on its current projections, people with reduced earning capacity have
the government anticipates that the gen- been improved, and periods of child-rear-
eral government surplus will decrease sig- ing are being taken into account to a great-
nificantly but not disappear in the medium er extent. Federal transfers to the statuto-
term, not least due to the increased funding ry health insurance system will total €98bn
for the Länder and local authorities. Part- in 2019 and increase to €114bn by 2023. The
ly as a result of this, the debt-to-GDP ratio Federal Ministry of Finance will provide in-
will fall below 60% this year and will there- formation about the sustainability of pub-
fore be under the 60% ceiling set out in the lic finances in its next Sustainability Report,
Maastricht Treaty for the first time since which will be issued at the end of 2019 or
2002. the beginning of 2020.German Stability Programme 2019 Page 9
Increasing employment levels even fur-
ther (especially among older people, women
and immigrants) and enhancing productivi-
ty growth are essential for ensuring that fi-
nances remain sound in the long term. That
is why the German government is making it
easier for older people to integrate into the
labour market, further expanding the pro-
vision of all-day childcare in order to im-
prove work-life balance, and taking steps to
ensure that the immigration of skilled la-
bour can be managed in a targeted way. It is
also making efforts to enhance productivi-
ty, for example by encouraging skills devel-
opment among the working population in
combination with life-long learning, con-
sistently promoting digital technologies in
the private sector and in public administra-
tion, and creating investment- and innova-
tion-friendly conditions for companies. In
response to demographic challenges, the
federal government has appointed a com-
mission on intergenerational fairness (Kom-
mission Verlässlicher Generationenvertrag)
that will look at ways to secure and develop
the pension system. It will issue its recom-
mendations by March 2020.
Specific federal government measures to
promote growth and employment are de-
scribed in detail in Germany’s National Re-
form Programme (NRP), which was adopt-
ed by the federal government on 10 April
2019 and will be submitted to the Europe-
an Commission by the end of April. In the
NRP, the federal government outlines how
it is addressing the macroeconomic chal-
lenges described by the European Commis-
sion in its 27 February 2019 Country Report.
It also describes the progress that Germany
has made in implementing the country-spe-
cific recommendations made by the Council
of the European Union in 2018.Page 10 SUMMARY
Figure 1: Interest expenditure in public budgets: a historical perspective
in % of GDP
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
Interest expenditure (national accounts definition)
Source: Federal Statistical Office, February 2019
Figure 2: Taxes 2010–2023
in %
25.5
Forecast
24.5
23.5
22.5
21.5
20.5
19.5
Tax-to-GDP ratio
Source: 1991-2018: Federal Statistical Office; 2019-2023: Finance Ministry projectionGerman Stability Programme 2019 Page 11
2. Aggregate economic conditions in Germany
2.1 Aggregate economic condi- industry. Overall, real exports rose by a to-
tions in Germany in 2018 tal of only 2.0% in 2018, following growth
of 4.6% in the previous year. At the same
time, real imports increased at a significant-
Although the German economy continued ly higher rate of 3.3%, meaning that the ex-
to expand in 2018, the second half of the ternal balance of goods and services reduced
year saw a noticeable loss of momentum. GDP growth by 0.4%, in purely arithmetic
Real GDP was up by 1.4% on the year and terms.
thus remained markedly below the growth In contrast, the domestic economy made
rates posted for the two preceding years a positive contribution to economic growth.
(2.2% in both 2016 and 2017) and slightly be- This is reflected by a marked increase in
low the overall potential output of 1.6% p.a. domestic demand (up by 1.9%) compared
The slowdown in economic momentum with the previous year. Strong employment
was reflected by weaker export growth in growth and rising incomes resulted in a fa-
particular. From June onwards, German ex- vourable consumer climate and also con-
ports recorded only slight gains. In addition tributed to higher investments in private
to low global economic momentum, un- residential construction. As a result of the
certainties associated with potential trade weak third quarter of 2018, however, private
disputes and the withdrawal of the Unit- consumption rose by a mere 1.0% in real
ed Kingdom from the EU exerted a negative terms. Private construction investment ex-
effect. Other factors included the problems panded at a noticeably higher rate, posting
experienced by the German automotive in- real growth of 2.4% on the year. Extreme-
dustry in connection with the transition ly low interest rates on the capital markets
to the new EU emissions testing standard and very high capacity utilisation in indus-
(Worldwide Harmonised Light Vehicle Test try gave a boost to investment in machinery
Procedure) as well as weather-related logis- and equipment, which increased by 4.2% on
tics bottlenecks, especially in the chemicals the year, adjusted for inflation.Page 12 AGGREGATE ECONOMIC CONDITIONS IN GERMANY
Labour market trends remained very 2.2 Short- and medium-term
positive. According to the Federal Statisti- outlook for the aggregate
cal Office’s preliminary calculations, aver- economy, 2019-2023
age employment rose to more than 44.8m
in 2018, the highest level since German re-
unification. This increase primarily affect- Leading indicators suggest that the weaker
ed jobs that are subject to social security economic momentum will persist in 2019.
contributions. A breakdown into industry Business sentiment remains subdued, and
sectors shows employment growth near- export expectations in the manufacturing
ly across the board. The highest increase in sector indicate that external economic un-
absolute terms was posted in manufactur- certainties are likely to continue. The con-
ing. Other sectors with above-average em- sumer climate offers more positive pros-
ployment growth included business-related pects. Rising wages and employment levels
services as well as health and social servic- and increased social benefits other than in
es. The number of unemployed persons av- kind contribute to this optimism.
eraged 2.34m in 2018, the lowest figure re- In its annual projection for 2019, the fed-
corded since reunification. The average eral government anticipates real GDP to
annual unemployment rate stood at only grow by a moderate 1.0%. The lower annu-
5.2%. According to the Federal Employment al rate of growth compared with the previ-
Agency, it has become considerably more ous year is partly attributable to a very slight
difficult to find skilled workers in a number carry-over effect from 2017. GDP growth
of occupational fields, especially technical will primarily be driven by domestic de-
occupations, construction, and health and mand, which is expected to remain strong
long-term care. (see Figure 3). Private consumption is pro-
On average, consumer prices rose by jected to increase by 1.3% in real terms and
1.8% on the year in 2018. The increase was will thus make a significant contribution to
driven primarily by higher energy prices for growth. This trend will be driven largely by
light heating oil and motor fuels. Core infla- continued increases in income and employ-
tion (the rise in consumer prices excluding ment. Gross wages and salaries are projected
the prices of food and energy) was 1.3% on to increase by 4.2%. Changes affecting taxes
average in 2018. and social security contributions that came
into effect at the beginning of 2019 coun-
teract fiscal drag effects and are thus expect-
ed to have a noticeable positive effect on net
wages (expected rise of 4.8%). Disposable in-
comes are projected to see a substantial rise
of 2.8% owing to (a) the increase in social
benefits other than in kind, which is partly a
result of federal government decisions, and
(b) the pension increase that is expected to
come into effect on 1 July.German Stability Programme 2019 Page 13
Despite the uncertainties emanating employment growth in 2019 might not con-
from the external economic environment, tinue at the same rate as in previous years.
gross fixed capital formation will probably Overall, employment is expected to ex-
continue to increase, as there are sound rea- pand by roughly 390,000 in 2019, bringing
sons for expansion investment in the busi- employment levels to a new record high of
ness sector. Examples include the high lev- 45.2m.
el of capacity utilisation, well-filled order Consumer price inflation is projected to
books and favourable financing conditions stand at 1.5% in 2019, slightly lower than in
as a result of low interest rates and high li- the previous year. This is partly due to the
quidity of businesses (see Figure 4). Given fact that prices for energy products are like-
the weaker momentum of the global econo- ly to be lower than in 2018. Core inflation is
my, however, investment in machinery and projected to reach 1.6%.
equipment is expected to grow at a slightly As a result of the somewhat slower pace
lower rate (+2.3%) than in 2018. In contrast, of growth in 2018, the positive output gap
construction investment is likely to post between actual GDP and potential output
a marked rise (+2.9%), as the strong labour has narrowed slightly. In view of the pro-
market, increases in household income and jected weakening of economic growth, the
low interest rates continue to favour pri- output gap will continue to decline by an es-
vate residential construction. Public invest- timated 0.4 percentage points in 2019, fall-
ment spending will also expand significant- ing to 0.4% of potential output. The feder-
ly once again in 2019. However, the marked al government assumes that real GDP will
rise in construction prices indicates increas- increase by 1.6% in 2020, of which approx-
ing supply-side constraints. imately 0.4 percentage points are attribut-
Global growth lost momentum last year. able to additional working days in the 2020
All larger member states within the euro calendar year. The medium-term projection
area recorded weaker growth than in the for the 2021–2023 period assumes average
previous year. International organisations annual GDP growth of 1.1% (see Figure 6).
expect the pace of economic growth to con- The positive trend on the labour market is
tinue to lose steam in the current year. As expected to continue. The number of people
a result, it is anticipated that real exports in work is projected to increase to approx-
will grow at only a moderate rate of 2.7% in imately 45.4m by 2023. Domestic demand
2019. The automotive industry could make will remain a key driver of growth.
a positive contribution once the problems The moderate projected rate of GDP
with the transition to the new emissions growth in the 2021–2023 period is attribut-
testing standard are resolved. Due to dy- able, on the one hand, to the technical as-
namic levels of domestic demand, imports sumption that the output gap will have
are expected to increase by a comparative- closed by 2023. On the other hand, esti-
ly high 4.0%. The current account surplus mated potential output growth is project-
is projected to continue to fall to approxi- ed to decline from currently 1.5% to 1.2% in
mately 7¼% of GDP. 2023. The reason for this is a weaker – and,
The labour market will most likely con- in 2023, negative – contribution of labour to
tinue to do well and play a key role in sup- growth. With labour force participation al-
porting the German economy. However, a ready extremely high and structural unem-
number of leading labour market indica- ployment very low, there is very little scope
tors, such as the number of vacant positions, for increasing potential output by further
have recently recorded a slight weakening. activating the domestic working-age popu-
Based on this, it is reasonable to assume that lation. Alongside the immigration of skilledPage 14 AGGREGATE ECONOMIC CONDITIONS IN GERMANY
labour, productivity-enhancing measures
arising from the increased use of digital
technology, both in the private sector and
in public administration, can be expect-
ed to become even more important in the
foreseeable future. This is made even more
pressing by demographic trends, including
the baby boomer generation reaching retire-
ment age.German Stability Programme 2019 Page 15
Figure 3: Factors contributing to real GDP growth in percentage points
3.0
2.5
2.0 Forecast
1.5
1.0
0.5
0.0
-0.5
-1.0
2015 2016 2017 2018 2019 2020
Domestic demand Net exports Gross domestic product
Source: 2015-2018: Federal Statistical Office; 2019-2023: annual projection by the federal government
Figure 4: Capacity utilisation in Germany
100
90
80
Index
70
60
50
Manufacturing Construction
Source: ifo InstitutePage 16 AGGREGATE ECONOMIC CONDITIONS IN GERMANY
Figure 5: Labour market trends in Germany
Vacancies and Employment
280 46
260 45
240 44
43
220
42
Index
millions
200
41
180
40
160
39
140 38
120 37
100 36
Vancancies Employment, right Y-axis
Source: Ifo Institute, Federal Employment Agency, Federal Statistical Office
Figure 6: Gross domestic product, in real terms
5 130
4
125
3
2 120
1
115
0
Index 2010=100
-1 110
Percent
-2
Forecast 105
-3
-4 100
-5
95
-6
-7 90
Year-on-year change in percent Gross domestic product, chain index
Source: 2000-2018: Federal Statistical Office; 2019-2023: annual projection by the federal governmentGerman Stability Programme 2019 Page 17
3. German fiscal policy in the European context
3.1 The rules of the Stability In 2018, Germany once again complied
and Growth Pact and the in full with the rules of the SGP. The country
Fiscal Compact and their successfully kept its nominal deficit well be-
low the upper limit of 3% of GDP. The actu-
implementation in Germany
al general government fiscal balance of the
Federation, Länder, local authorities and so-
The Stability and Growth Pact (SGP) re- cial security funds, including off-budget en-
quires member states to bring their budgets tities, stood at +1.7 % of GDP in 2018. As Fig-
close to balance over the medium term and ure 7 shows, the general government budget
to set their own binding targets to this end. recorded a structural surplus of 1.4% in
The SGP also sets upper limits on budget 2018.
deficits and debt ratios. Compliance with
these targets and limits serves to safeguard
each euro member state’s capacity to act.
This includes flexible rules that allow for
investment as well as structural reforms to
enhance growth potential. In this way, the
SGP requires that all EU member states pur-
sue stability-oriented fiscal policies as a pre-
condition for ensuring strong, sustainable
growth in Europe.Page 18 GERMAN FISCAL POLICY IN THE EUROPEAN CONTEXT
Figure 7: Comparison of structural and actual fiscal balance (in % of GDP)
2
1
0
-1
-2
-3
-4
-5
-6
Maastricht budget balance
Maastricht reference value
Structural balance
Medium-term objective (MTO – upper limit for structural deficit)
1995: Excluding asset transfers resulting from the assumption of debt owed by the Treuhand privatisation agency and German Democratic
Republic housing construction companies. When this factor is included, the general government deficit amounted to 9.4% of GDP.
2000: Excluding UMTS proceeds. When this factor is included, the general government budget ran a surplus of 0.9% of GDP.
Source: Federal Statistical Office, February 2019; Finance Ministry calculations
Alongside strong GDP growth, the gen- percentage points in the relevant three-year
eral government budget surpluses of recent period from 2016–2018. The reduction actu-
years have contributed significantly to re- ally achieved was even higher, meaning that
ducing the debt-to-GDP ratio, which is on a Germany also complied with this SGP rule
sustained downward path. In 2018, the debt- by a comfortable margin.
to-GDP ratio fell by 3.6 percentage points to Germany is currently subject to what is
60.9% of GDP. As part of the reforms adopt- known as the preventive arm of the SGP.
ed in 2011 to strengthen the SGP, the EU in- Member states subject to measures of the
troduced the “1/20 rule” as a way to spur SGP’s preventive arm must, over the medi-
the reduction of excessive debt levels. This um term, achieve budgets that are close to
rule, which is binding on all member states, balance or in surplus. To this end, they set
requires that the gap between a member a medium-term objective (MTO) for their
state’s debt level and the 60% Maastricht general government structural budget bal-
upper limit be reduced by at least 1/20 per ance. The structural balance is determined
year, averaged over the most recent three by adjusting the nominal balance for cycli-
years. For Germany, this translates into a re- cal and one-off effects. Euro area member
quired reduction of the debt-to-GDP ra- states must also comply with the fiscal com-
tio by an annual average of approximately 3 pact (Treaty on Stability, Coordination andGerman Stability Programme 2019 Page 19
Governance in the Economic and Mone- 3.2 Fiscal situation and strate-
tary Union), which stipulates that the gen- gic direction
eral government budget must be balanced
or in surplus. This is achieved if the MTO is
met. A member state whose ratio of general
government debt and GDP at market prices On 22 January 2017, the ECOFIN Council issued the following
is significantly below 60% and whose risks recommendations to euro area member states for their fiscal
in terms of the long-term sustainability of policies:
public finances are low is permitted to in-
crease the structural deficit under its MTO "While pursuing policies in full respect of the Stability
to a maximum of 1.0% of GDP at market and Growth Pact, support public and private investment and
prices. With its Stability Programme, Ger- improve the quality and composition of public finances. Rebuild
many retains its target of a structural deficit fiscal buffers, especially in euro area countries with high levels
no higher than 0.5% of GDP. of public debt. Support and implement EU actions to combat
The requirements of the SGP’s preven- Aggressive Tax Planning. Shift taxes away from labour and
tive arm also include an expenditure bench- strengthen education and training systems and investment in
mark, which limits permissible increas- skills, as well as the effectiveness of active labour market policies
es in government spending for member that support successful labour market transitions. Promote
states that are on the adjustment path to- quality job creation and address labour market segmentation
wards their MTO or are just reaching it. The and ensure adequate and sustainable social protection systems
expenditure benchmark is not binding if across the euro area."
a member state outperforms its MTO and
is not at risk of failing to comply with the
MTO throughout the duration of the pro- The federal government takes these
gramme. This is the case for Germany. guidelines into account in its fiscal policy. It
has set itself the goals of enhancing the Ger-
man economy’s growth drivers and future
viability, strengthening social cohesion, and
ensuring that public finances are sound. Fis-
cal policy conditions have been highly fa-
vourable so far, with a strong labour market,
record levels of employment, above-average
tax receipts and low interest on government
debt. However, it is essential that Germany
be prepared for the many challenges ahead.
These include the financing of climate
protection measures and the associated
phasing-out of coal mining and the pro-
duction of electricity from coal, as was rec-
ommended by an expert commission; the
assumption of responsibility at the interna-
tional level with regard to security and de-
velopment cooperation; and Germany’s fu-
ture financial contributions to the European
Union budget. There are also demograph-
ic challenges. The baby boomer generation
will soon start to reach retirement age. ThePage 20 GERMAN FISCAL POLICY IN THE EUROPEAN CONTEXT
consequences of this will put fiscal policy to Because many of these areas fall within the
the test. The federal government has there- remit of the Länder and local authorities, the
fore appointed a commission on intergener- federal government has taken steps to equip
ational fairness that will look at ways to se- these government levels with substantial fi-
cure and develop statutory pension funds as nancial resources.
well as the two other pillars of the pension Another key aim pursued by the German
system after 2025. It will issue its recom- government is to enhance social equity and
mendations by March 2020. strengthen social cohesion. To this end, the
The German government is pursuing government is supporting lower- and mid-
fiscal policies that promote education, re- dle-income groups as well as families. Funds
search and digital innovation through in- for the construction of social housing are
creased investment, thereby boosting pro- being increased in 2019. In addition, more
ductivity and growth potential. According funding will be provided for the integration
to the federal government’s current pro- of long-term unemployed persons into the
jections, the general government budget labour market. The Federation’s high levels
will once again post a substantial surplus of social spending reflect the priority giv-
in 2019, but this surplus will be smaller en to this area: in 2019, social spending will
than the surplus recorded in 2018 (+¾% of rise to €173m. Its share in the federal budget
GDP in 2019 compared with 1.7% in 2018). will increase to more than 50%. At the gen-
In 2019, Germany plans to take fiscal pol- eral-government level, social spending will
icy measures that will result in addition- account for 24¼% of GDP.
al spending in the amount of 0.5% of GDP
and reduced revenue in the amount of 0.2%
of GDP. According to the projections, the cy-
clically adjusted primary balance will de-
cline by ¾ of a percentage point, from 2.2%
to 1½% of GDP, meaning that Germany’s
fiscal policy approach can be classified as
distinctly expansionary. Despite the fact
that economic growth has slowed, the Ger-
man economy is still running at slightly ex-
cess capacity. The positive output gap is set
to narrow from 0.8% of potential GDP in
2018 to 0.4% in 2019. Germany’s expansion-
ary fiscal policy appears appropriate in or-
der to counteract cyclical and external eco-
nomic risks.
Thanks to the federal government’s pol-
icies, general government investment by
the public sector (+7¾ yoy) and investment
by the Federation (€38.9bn) will both rise
to record levels in 2019. The federal govern-
ment’s investments until 2023 will focus on
priority areas that are crucial for Germany’s
future, namely infrastructure, education,
universities, research and digital technology.German Stability Programme 2019 Page 21
Figure 8: Change in the Federation’s structural deficit (in % of GDP)
Reduction path for structural new borrowing,
set in 2010
2.0 1.90
Maximum permissible structural deficit
(0.35% of GDP from 2016 onwards)
1.59
Structural deficits: actual values for 2011 to 2018;
1.5
1.28 negative values denote surpluses
0.97
1.0
0.66
0.85
0.5 0.35 0.35 0.35 0.35 0.35 0.35 0.35 0.35
0.34 0.09
0.0 0.14 -0.16
-0.03
-0.15
-0.27
-0.5
2011 2012 2013 2014 2015 2016 2017 2018
The financial balances of the Energy and Climate Fund (2011 onwards), the Aufbauhilfefonds (a special relief fund established to remedy
the damage caused by the June 2013 floods in Germany, 2013 onwards), the Local Authority Investment Promotion Fund (Kommunalin-
vestitionsförderungsfonds, a special fund to promote investment at the local authority level, 2015 onwards) and the Digital Infrastructure
Fund (2018 onwards), all of which are relevant for determining the Federation’s structural deficit, are taken into account.
Source: Federal Ministry of FinancePage 22 GERMAN FISCAL POLICY IN THE EUROPEAN CONTEXT
3.3 Fiscal policy measures in
terms of expenditure and
revenue
The aim of investing in infrastructure, edu- An amendment to the Basic Law is nec-
cation and research is to enhance Germany’s essary in order to implement some of the
potential for growth. Boosting public invest- relief measures that will benefit the Länder.
ment is a fiscal policy priority for the fed-
eral government in the current legislative
term. In 2018, the Federation made available
a total of €14.3bn for investment in federal
transport infrastructure. This figure will be
increased to approximately €14.6bn in 2019.
Moreover, the federal government contin-
ues to support the Länder and local author-
ities with their investments, including the
areas of social housing and local public pas-
senger transport. This is being achieved by
increasing the Länder’s share of VAT reve-
nues and, starting in 2020, providing high-
er supplementary grants to financially
strapped Länder, as set out in the 2017 reor-
ganisation of financial relations between the
Federation and the Länder. The federal gov-
ernment is making available a total of €5bn
for the construction of social housing over
the 2018–2021 period. Federal government
funds for local public passenger transport
are being increased by €1.7bn over the peri-
od ending in 2022.
In addition, the federal government has
created a special digital infrastructure fund,
most of which (70%) will be used to sup-
port the nationwide roll-out of gigabit net-
works. These efforts will be co-financed by
the Länder and local authorities. The re-
maining 30% will be used to support the
Länder in implementing the “Digital Pact for
Schools”, which aims to improve conditions
at all schools across Germany to ensure that
education becomes better geared towards
digital processes. The federal government
already allocated €2.4bn to the special fund
in 2018. Starting this year, revenues from
the allocation of 5G frequencies will be paid
into the digital infrastructure fund.German Stability Programme 2019 Page 23 Basic Law amendment to increase the financial support provided by the Federation to the Länder New legislation amending the Basic Law (Gesetz zur Änderung des Grundgesetzes), especially Articles 104c, 104d and 125c, gives the Federation additional powers to provide financial support for the investments of the Länder and local authorities in local education infrastructure, the construction of social housing and local public rail transport. Under the German constitution, responsibility for education infrastructure lies with the Länder. In view of the considerable need for investment in this area, the Federation will, in future, be able to provide more support to the Länder for certain tasks with the help of ring-fenced co-financing. These tasks include local education infrastructure, especially all-day schooling and childcare, digital technologies and vocational schools. In the past, the Federation’s ability to provide financial assistance was limited to co-financing the investments made by financially strapped local authorities. This constraint has now been lifted (Article 104c of the Basic Law). The first stage of Germany’s federal reforms (Föderalismusreform I) in 2006 transferred sole responsibility for promoting social housing to the Länder. However, the situation in the housing market has become more strained in many regions, especially in large metropolitan areas. Property prices and rents have risen considerably in recent years. The aim is to allow the Federation to counteract these tensions by allocating funds for the construction of social housing. In future, the Federation will be able to provide direct, ring-fenced financial assistance to the Länder for the construction of social housing (new Article 104d of the Basic Law). Under another amendment (Article 125c of the Basic Law), the federal government is now already able to top up funds for special programmes in the area of local public rail transport under section 6(1) of the Local Transport Financing Act (Gemeindeverkehrsfinanzierungsgesetz), a change that had previously been slated for 2025 under the 2017 reorganisation of financial relations between the Federation and the Länder.
Page 24 GERMAN FISCAL POLICY IN THE EUROPEAN CONTEXT
The government is strengthening social amounted to approximately €7.5bn in 2018.
cohesion with the help of targeted measures This will be continued in 2019. A total of ap-
in the areas of tax policy, education, and so- proximately €6.2bn has been allocated for
cial security. To promote early childhood this purpose in the 2019 federal budget.
education and care and improve work-life The federal government also spends sig-
balance, the Federation will allocate €5.5bn nificant amounts of money in crisis-hit re-
over the period until 2022 to improving gions and the main countries of origin of
quality in child day care and making it more refugees, partly in the hope of reducing po-
affordable for parents. Starting on 1 July tential migration flows. Last year, about
2019, the maximum child supplement rate €6.9bn were allocated to addressing the root
will be raised from €170 to €185 per month causes of refugee flows and supporting ref-
and child. This supplementary benefit is ugees in their regions of origin. The federal
available to low-income families in which government plans to spend a further €6.9bn
parents’ earnings are not sufficient to fully on this in 2019.
meet children’s subsistence needs. In the area of international development
A new home ownership-related child cooperation, the federal government has
benefit (Baukindergeld) came into force in made a commitment, conditional upon the
September 2018. It provides targeted sup- availability of funds, to at least maintain the
port to families and single parents for their current ODA ratio (Official Development
first purchase of owner-occupied hous- Assistance ratio, which measures spending
ing. The amount of the benefit is €1,200 per in relation to gross national income), not in-
child per year for a period of up to ten years. cluding domestic refugee-related costs that
A sum of €570m has been allocated for this are eligible as ODA. According to the OECD’s
in the 2019 federal budget; approximate- calculations, Germany’s 2017 ODA spending
ly €3.8bn will be provided in the period up amounted to US$25.0bn, which translates
to 2023. into an ODA ratio of 0.67% of GDP (includ-
The federal government’s financial bur- ing eligible domestic refugee-related costs).
den has increased in connection with the Defence expenditure, according to
large number of refugees who have been NATO’s definition, will increase by about
taken in in recent years. Since 2015, the fed- €5.2bn to a total of €47.3bn in 2019 com-
eral government has provided substan- pared with actual spending in 2018. This will
tial relief to the Länder and local author- allow the Federal Armed Forces to improve
ities for refugee-related spending. Länder staffing and continue to modernise equip-
receive €670 per asylum seeker per month ment, thus reinforcing the turnaround in
during the asylum procedure and a sum of defence spending that has already been put
€670 for each asylum seeker whose applica- into action. In this way, Germany is meeting
tion is denied. Including ex-post accounting its mutual defence obligations towards its
and a part payment for September–Decem- NATO allies and supporting the EU’s Com-
ber, the Federation’s additional contribution mon Foreign and Security Policy.
for 2018 stood at approximately €1.6bn. In Germany is fulfilling its international re-
addition, the federal government provided a sponsibilities in other areas, too. The Ger-
€2bn block grant to the Länder for integra- man government has taken on an appropri-
tion measures. The federal government also ate share of international climate protection
met all additional accommodation costs for spending and is one of the world’s largest
persons granted asylum status or protect- contributors. In 2015, Germany announced
ed status. In total, the refugee-related relief that it would aim to increase its contribu-
provided to the Länder and local authorities tion to international climate protection fi-German Stability Programme 2019 Page 25
nancing to €4bn by 2020, using budgetary “midi-jobs”) is being expanded towards the
resources and grant equivalents1 from de- threshold for employment subject to un-
velopment loans. At the Climate Change limited social security contributions. From 1
Conference in Katowice in December 2018, July 2019 onwards, the upper limit on earn-
the signatory states of the Paris Agreement ings for reduced contributions will be raised
were able to agree on a comprehensive rule- from €850 to €1,300. In addition, the low-
book. At an early stage of the negotiations, er pension contributions of people in this
Germany announced that it would increase group will no longer result in a lower pen-
its contribution to the Green Climate Fund sion entitlement. In future, someone on
substantially. Initially, in 2015, the Ger- a gross monthly income of €850 will pay
man government pledged €750 to the fund, about €23 less per month in social security
which will be provided from the feder- contributions. The changes will benefit up to
al budget by 2023. In Katowice, the federal 3.5m people.
government announced that it would pro- In addition, the German government is
vide up to €1.5bn in additional resources to reducing the contributions of those insured
the fund starting in 2020. under the statutory health insurance sys-
To implement climate protection goals tem by about €8bn per year. Contributions
in Germany, the federal government had to statutory health insurance are now once
set up an expert commission for growth, again financed in equal parts by employers
structural change and employment. It pre- and employees, a change that came into ef-
sented its final report at the end of Janu- fect at the beginning of 2019. This lowers the
ary 2019, in which it recommended phasing average supplementary premium by 0.5 per-
out coal mining and the production of elec- centage points of the income subject to so-
tricity from coal by 2038 at the latest. The cial security contributions in 2019. Starting
German government is currently analysing at the beginning of 2019, the contribution
these recommendations, including the po- rate to unemployment insurance was also
tential costs. To date, the government has lowered by 0.5 percentage points of gross
earmarked a total of €2.5bn to support the earnings subject to contributions. This was
necessary structural changes in its financial possible thanks to the reserves that had been
plan to 2023. accumulated in the unemployment insur-
On the revenue side, the feder- ance system as a result of the sustained em-
al government is placing an emphasis on ployment boom on the German labour mar-
growth-friendly and socially equitable tax ket. To cover additional costs arising from
policy. Lower taxes and social security con- the expansion of services in the long-term
tributions, especially for families and low- care sector in the current legislative term
er- and middle-income earners, are boosting and thus ensure that contributions remain
disposable incomes and creating positive in- stable until 2022, the contribution rate in
centives for labour market participation. the social long-term care insurance system
The government’s changes to social securi- was increased by 0.5 percentage points start-
ty contributions are particularly advanta- ing on 1 January 2019.
geous for lower-income groups. The current The volume of the various tax relief
sliding scale for jobs with reduced employ- measures planned by the federal govern-
ee social security contributions (known as ment will significantly exceed €25bn per
year by the end of the legislative term in
1 The grant equivalent is the difference between
the face value of a loan and the present value of its
2021. For example, the Act to Reduce Fami-
debt service (principal and interest, discounted by ly Tax Burdens and to Modify Additional Tax
the rate set by the OECD’s Development Assistance Regulations (Gesetz zur steuerlichen Entlas-
Committee).Page 26 GERMAN FISCAL POLICY IN THE EUROPEAN CONTEXT
tung der Familien sowie zur Anpassung wei- The federal government also wants to
terer steuerlicher Regelungen) entered into ensure that businesses enjoy growth-friend-
force at the beginning of 2019. It sets out in- ly and fair tax conditions. To this end, it
creases in basic personal allowances, child plans to present draft legislation introduc-
benefit and tax-free child allowance as well ing tax incentives for research in the first
as steps taken to counteract bracket creep half of 2019.
that will make taxpayers as a whole €9.8bn Taking effective action against tax fraud
better off each year. In addition, starting in and tax avoidance is another key priori-
2021, the solidarity surcharge will be elimi- ty for the federal government. In December
nated for roughly 90% of income tax payers 2018, Germany adopted legislation aimed at
previously subject to it, which corresponds avoiding losses in VAT revenue in the online
to a tax cut of approximately €10bn. goods trade by making marketplaces liable
The federal government is creating tax for remitting VAT. In addition, the German
incentives for private residential construc- government is intensifying cross-border co-
tion. The Act on Tax Incentives for the Con- operation to combat international tax fraud
struction of New Rental Housing (Gesetz zur and tax avoidance, especially through com-
steuerlichen Förderung des Mietwohnungs- prehensive exchange of information, data
neubaus) introduces a time-limited special and experience with authorities in other
depreciation allowance for affordable new countries.
rental properties. The aim is to encourage The German government is committed
investment in new rental housing as quick- to fair and efficient taxation beyond Ger-
ly as possible. This measure will reduce the many’s national borders. Further meas-
general government tax take by a project- ures to combat base erosion and profit shift-
ed €0.3bn per year by the end of the projec- ing (BEPS) are necessary as a follow-up to
tion period. the successful G20 and OECD project in this
In addition, changes to real property tax area. In addition, a comprehensive and in-
are to be introduced before the end of the ternationally coordinated approach is need-
year. Real property tax accrues solely to the ed in order to tackle the challenges of tax-
local authorities and is one of their main ing the digital economy. To address these
sources of income. In 2018, revenue from two issues, the OECD is currently discussing
this tax amounted to roughly €14.2bn . Un- the redistribution of taxation rights and – at
til now, real property tax has been calculat- the joint initiative of Germany and France
ed on the basis of assessed values for hous- – measures for effective international min-
es and undeveloped land dating from 1964 imum taxation. A final report will be pub-
(in the Länder of former West Germany) or lished in 2020.
1935 (in the Länder of former East Germa- At the EU level, Franco-German cooper-
ny). In April 2018, the Federal Constitution- ation on a common corporate tax base will
al Court declared this to be unconstitution- inject fresh momentum into the negotia-
al and demanded a change by the end of tions in the Council of the European Union
2019. The main point of criticism was that on the harmonisation of direct taxes. This
the values applied no longer sufficiently re- cooperation is based on the European Com-
flect actual changes in value. The reform mission’s draft directive. At a bilateral min-
will observe the requirements of the Federal isterial meeting at Schloss Meseberg outside
Constitutional Court, maintain current rev- Berlin in June 2018, Germany and France
enue levels and retain the right of local au- agreed on a joint policy position and also
thorities to apply a multiplier. gave new momentum to deliberations about
a European financial transaction tax.You can also read
