Economic surveys and country surveillance

Economic survey of Germany 2008: Preserving past achievements in fiscal policy and making the tax system more efficient

 

Contents | Executive summary | How to obtain this publication | Additional information

The following OECD assessment and recommendations summarise chapter 2 of the Economic survey of Germany published on 9 April 2008.

 

Contents                                                                                                                             

Fiscal rules need to be improved to avoid pro-cyclical policies

While the favourable cyclical development has helped to improve government finances, the largest contribution came from expenditure restraint. The revenue share has been broadly stable, despite the increase in the VAT rate in 2007 and strong growth in direct taxation, owing to lower social security contributions. Going forward, past achievements in fiscal policy should be preserved and pro-cyclical policy during the upswing avoided. International comparisons show that sensibly designed fiscal rules can be helpful in this regard. The current fiscal rule arrangement enshrined in the German constitution, which follows a golden rule methodology, states that the deficit should not be higher than investment in a given year, but has not proved to be effective. It has prevented neither a rise in the debt level nor pro-cyclical policies. It should thus be replaced by the requirement of a balanced budget in cyclically-adjusted terms, in line with the regulations of the Stability and Growth Pact. This rule could be made more effective by making the underlying expenditure path public and binding. This should also be applied to sub-national levels which might require strengthening the tax autonomy of the Länder. Allowing them to levy a surcharge to the income tax which would not be taken into account in the fiscal equalisation scheme would be one option.

 

Government finances have improved significantly
Per cent of GDP

Note: All variables refer to general government. Per cent of potential GDP for cyclically-adjusted deficit.
Source: OECD (2007), OECD Economic Outlook 82 Database and National Accounts Database.

 

Shifting the tax burden more towards immobile bases would help further budget consolidation

As population ageing requires further budget consolidation, efforts also need to be stepped up to safeguard future tax revenues in a globalised world with mobile tax bases. Lowering corporate tax rates and broadening the tax base from 2008 onwards is a step in the right direction as it addresses the problem of outward profit shifting. But it may not be enough over the long run to secure the corporate tax base, as statutory tax rates after the reform will be higher than in a number of other countries and as global tax competition will induce other countries to lower their rates, too. Thus, shifting more of the tax burden from mobile to immobile tax bases should be considered. Options would be to lower the local business tax and to increase property taxes at the municipal level. Also, pressures to abolish inheritance taxes should be resisted. Additional tax revenue might also be gained by improving the tax collection process, for example by centralizing corporate tax collection at the federal level. This would help to circumvent a potential loss of revenue induced by the lack of incentives for states to levy the tax rigorously. Alternatively, the fiscal equalisation scheme could be reformed so that transfers are computed on the basis of tax capacity rather than actual tax revenue. Furthermore, the current application of the reduced VAT rate should be reconsidered for products for which a reduction is no longer justified.

 

 

How to obtain this publication                                                                                             

The Policy Brief (pdf format) can be downloaded in English. It contains the OECD assessment and recommendations.

Eine Druckversion des Policy Brief in deutsch (pdf Format) kann ebenfalls heruntergeladen werden. Es enthält die Gesamtbeurteilung und die Empfehlungen, aber nicht alle oben gezeigten Grafiken.

The complete edition of the Economic survey of Germany 2008 is available from:

Additional information                                                                                                     

 

For further information please contact the Germany Desk at the OECD Economics Department at eco.survey@oecd.org. The OECD Secretariat's report was prepared by David Carey, Felix Hüfner and Nicola Brandt under the supervision of Andreas Wörgötter. Research assistance was provided by Margaret Morgan.

 

 

 

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