Each year Germany’s companies and private citizens receive some € 50 bn in subsidies.
This combination of financial assistance and tax breaks is intended to strengthen selected companies, sectors and regions. Since, of necessity, only a very few profit from them, subsidies distort competition and send false signals to the market. For example, companies may base their decision for or against a business location solely on the state subsidies to be obtained rather than on the economic fundamentals.
Actually, subsidies should only be granted in exceptional cases, and for a limited period, to help companies to adapt to structural change (adaptation subsidies). However, only a tenth of all spending on subsidies serves this purpose, and this proportion is decreasing. In most cases, subsidies preserve traditional structures, for example in agriculture (preservation subsidies).
The government has recently cut some subsidies, such as the home-owners’ allowance. At the same time, it has introduced new subventions, such as subsidies for biofuels and the reduced rate of VAT for hotels.