About half of the German gross domestic product is spent via public budgets such as the federal budget, the federal states’ budgets, the municipalities’ budgets or the social securities’ budgets.
Besides this evident debt, the social system contains a number of implicit liabilities such as pension-warranties. Germany spends about a third of its economic output on social benefits, more than most other industrialised countries. Demographic change will put the system of benefits under even greater stress.
The purpose of unemployment insurance is to ensure, by replacing part of their missing income, that those who lose their jobs do not suffer materially.
Active labour market policies include measures which raise the expenditures of the unemployment insurance system to questionable effect. Publicly subsidised employment, for example, displaces regular employment, whilst rarely easing participants into proper jobs. Extending the entitlement period for older claimants is expensive for contributors. At the same time, it does nothing to help the recipients, who are given an incentive to absent themselves from employment for even longer. During this time, their know-how becomes out of date, making it more difficult for them eventually to find a new job.
Germany spends more than a tenth of its economic product on its health sector, most of it going to the statutory health insurance funds.
For this reason, it should be possible to vary the level of insurance contributions to reflect the choice of provider. In addition, the current income-related contributions for statutory health insurance should be replaced by a realistic insurance premium. Insurance cover for those with low incomes could be secured by means of a tax-financed subsidy.
Germany’s statutory long-term care insurance currently covers some 70m Germans against at least part of the financial risk of requiring long-term nursing. Members of the compulsory insurance scheme who become dependent on long-term care receive cash benefits based on the degree of nursing required.
However, instead of securing the long-term care insurance against demographic change, the government has saddled it with new benefit entitlements. The long-term care reform of 2008 led to a rise particularly in benefits for home nursing. One way out of the dilemma presented by the prospect of soaring contribution rates for later generations would be to change the method of financing to a funded system. This would oblige people to make provision for their own nursing care.
The pharmaceutical industry makes a considerable contribution to medical progress and thus also to the enhancement of life expectancy and the quality of life. However, the public debate in Germany is dominated by the high expenditures which this same medical progress imposes on the health system.
Whilst the opening of markets offers German companies new sales opportunities, it also makes the competition over the location of production and research facilities fiercer. Firms based in Germany are being challenged by competitors who in many cases enjoy better conditions for their research and manufacturing in other countries. As a result, the government faces the challenging task of making investment, innovation and recruitment in Germany more attractive for pharmaceutical companies, and at the same time providing the population with the best possible medical care.
In recent decades the state has taken on more and more responsibilities. Since tax revenues have been insufficient to finance these new tasks and politicians have been reluctant to raise taxes, Germany has taken on new debt.
In fact, there are rules designed to stop this mountain of debt growing. The constitutiostipulates that new borrowing must not exceed the level of public investment. And the European Union requires the annual net increase in debt to be below 3% of gross domestic product (GDP). Neither of these provisions has done much good. Recently, therefore, the constitution has been changed to include a so-called 'debt brake', which provides that the federal government must reduce its structural deficit, i.e. that proportion of new borrowing which does not fall even in an economic upswing, to 0.35% of the nation’s economic output. The state governments will in future be forbidden any structural deficit at all, although they have until 2020 to balance their budgets.
To meet these constitutional requirements, governments at all levels must make an immediate start on consolidating public finances. As the population can hardly be expected to accept higher taxes and levies, savings must be achieved through cuts in subsidies, social insurance or public administration. As other countries have shown, in many fields the same results can be achieved with less money.
The state receives around three quarters of its tax revenues from four types of tax: income, value-added, energy and trading taxes. Common to most other levies, such as dog, hunting and inheritance taxes, is that the amount of revenue generated bears no relation to the administrative expense.
Last but not least, taxes serve the purpose of redistribution. Income tax burdens those with high earnings more than low earners, not only in absolute amounts but also in percentage terms. Since the state needs ever more revenues, however, the higher rates have now begun to apply to medium incomes. Hence, if performance is to be better rewarded, people must be able to keep more of their pay. Lower tax rates benefit the state, too, since when the economy becomes stronger, tax revenues increase as well.
Germany’s pharmaceutical and medical technology industry contributes to medical care both in the domestic health care market and in many other countries.
In recent years, the pharmaceutical and medical technology industry has focused particularly on such fast-growing emerging economies as China, India and Brazil. Companies in the sector are hoping for strong sales growth there because widespread spending cuts have curtailed the sales opportunities in European markets. However, despite the current economic and political risks, with increasing prosperity in emerging and developing nations and life expectancy growing in the industrialized countries, the prospects for the German pharmaceutical and medical technology industry are good.
Rising life expectancy and a low birth-rate are disturbing the balance of the German state pension system, which is financed on a pay-as-you-go basis. Since 1993, the number of pensioners in the system has increased by 5 m to over 20 m and is set to grow even faster when the baby-boomers born in the fifties and sixties reach retirement age.
Indeed, this course has already been set. The so-called sustainability factor in the formula by which pensions are calculated limits the rise in pensions when the ratio of contributors to recipients worsens. The Riester factor, named after a former minister of labour, reduces the growth in pensions in return for state subsidies to private pension schemes. The latest reform, raising the retirement age to 67, is the result of the realisation that the extra years gained by the rise in life expectancy cannot be spent exclusively in retirement. Instead, working life must be extended. To avoid increasing the burden on future generations, retirement incomes will increasingly have to be provided by company and private pension schemes.