Foundations for Growth and Competitiveness 2026

Germany

After a decade of strong export-led growth, the COVID-19 pandemic, Russia’s war of aggression against Ukraine and rising trade tensions have hit the German economy and emphasised the need to accelerate structural reforms. Productivity growth had slowed down even before the pandemic due to weak public and private investment, declining business dynamism and rising skilled labour shortages exacerbated by rapid population ageing.

The recent reform of fiscal rules should be complemented with structural reforms to revive economic growth. Simplifying infrastructure planning and approval procedures, and improving the financial and administrative capacity of municipalities, is key to ensure the quick and efficient implementation of investment plans. Reducing high administrative burdens and regulatory barriers to competition is needed to revive business dynamism, investment and productivity growth. Improving labour supply incentives in the tax and transfer system for women, older and low-income workers and strengthening education and training policies would help address skilled labour shortages.

Economic performance

Gaps to the average of the upper half of the OECD countries

Source: Panel A: OECD, Economic Outlook database; Panel B: OECD, Labour Force Statistics database; Panel C: OECD, Economic Outlook and Productivity databases; Panel D: OECD, Economic Outlook and Annual National accounts, GFCF by assets databases.

Selected policy gaps

Source: OECD calculations based on the Foundations for Growth and Competitiveness database.

Infrastructure: Simplify planning and approval procedures and strengthen administrative capacities of municipalities

Complex and lengthy infrastructure planning and approval procedures are a major factor for a large investment backlog in energy, digital, transport, and education infrastructures. Municipalities are responsible for a large share of public infrastructure investments, but financial difficulties and weak infrastructure planning capacities have led to negative net investment at the municipal level since the early 2000s. Non-discretionary expenditures legislated by other government levels, such as social benefits, have limited funds for municipal infrastructure investments. Moreover, the large number of small municipalities implies high unit costs of public service delivery, while labour shortages are high and the digitalisation of public services has been slow, leading to limited administrative capacities in many municipalities. The 2025 reform of fiscal rules should be combined with improving infrastructure planning and implementation.

Recommendations

✓ Streamline planning processes and improve public procurement through harmonisation and better use of digital tools, while bolstering local planning capacity through inter-municipal cooperation, training and expanding staffing in key technical roles.

✓ Compensate municipalities for future federal legislative changes affecting municipal budgets by increasing the share of joint taxes allocated to municipalities, while ensuring that grants from Laender through the municipal equalisation systems are not reduced in exchange.

✓ Encourage more cooperation across municipalities in public service delivery, including through financial incentives and capacity building initiatives, and consider transferring some tasks to other levels of government to free staff resources.

Governance: Lower the administrative burden and accelerate the digitalisation of the public administration

Complex regulations and administrative procedures that differ across sub-national governments and municipalities lead to high administrative burden, hampering firm entry and growth in many markets, for example in construction. While regulatory impact assessment is mandatory for any proposed legislation and a one-in-one-out rule exists to limit the increase of administrative burden for firms, enforcement and capacities for policy impact evaluation remain weak. Moreover, a one-stop shop for starting a firm does not exist because many decentralised registries and administrative procedures are still not digitalised or inter-linked, which is related to existing legal hurdles as well as a lack of common IT standards across levels of government.

Recommendations

✓ Expand efforts to harmonise existing regulations and administrative procedures across levels of government.

✓ Strengthen the power of the Normenkontrollrat to scrutinise the regulatory impact assessment of ministries, improve capacities for cost-benefit analysis in ministries and strengthen stakeholder engagement.

✓ Set mandatory common standards on design and inter-linkage of data and IT tools, while addressing legal hurdles to the inter-linkage of decentralised registries.

Competition: Reduce regulatory barriers to competition to revive business dynamism and innovation

Occupational entry regulations and licensing requirements to open a business are high, hampering market entry and competition, for example in the construction sector. The scope of state-owned enterprises (SOEs) is larger and their governance weaker than on average in the OECD, and the enforcement of competitive neutrality has room for improvement. Continuing to fight corruption and money laundering is key to level the playing field between firms. Capacity constraints, duplications and weak cooperation between federal and Laender law and tax authorities hinder the fight against money laundering and tax evasion.

Recommendations

✓ Reduce occupational entry restrictions, particularly in crafts and trade-related occupations.

✓ Strengthen the power of the competition agency to challenge decisions by public bodies and regulators that hamper competition.

✓ Implement plans to establish the Federal Financial Police, strengthen its investigative capacities, data access and cooperation with enforcement agencies of the Laender.

Labour market: Improve labour supply incentives in the tax and transfer system

Labour taxes are among the highest across the OECD, reducing labour supply incentives, while the share of revenue from property, capital gains and indirect taxes is lower than in the average OECD country. More than one sixth of the workforce works in part-time jobs exempted from employees’ social security contributions (Mini-Jobs), the large majority being women. This is also related to the joint income taxation of married couples, which leads to particularly high effective marginal tax rates for second earners. The effective age of labour market exit is significantly below the legal retirement age due to generous early-retirement schemes, which are mainly used by workers with higher education and incomes and above-average health status.

Recommendations

✓ Lower personal income taxes, while raising revenue from property taxes and excise duties on alcohol and tobacco, and reducing tax expenditures in capital income, inheritance, VAT and environmental taxation.

✓ Restrict Mini-Jobs to school and university students while lowering the marginal tax rate for second earners by reforming the current joint taxation of couples.

✓ Phase-out fiscal incentives for early-retirement so that pension benefit reductions when retiring early are at least actuarially neutral and link the statutory retirement age to life expectancy.

Human capital: Strengthen education, training and adult learning policies to address skilled labour shortages

About 3 million young adults have no professional degree due to weak foundational skills, and many VET positions remain vacant. According to the OECD PISA study, educational inequality remains high and average performance outcomes have deteriorated since 2018. Structural change due to the green and digital transition will require more up- and re-skilling of workers, but participation in adult learning courses is low. This is related to the lack of harmonised quality standards and certification in the fragmented adult learning system, which creates information asymmetries and weighs on training quality.

Recommendations

✓ Introduce a mandatory high-quality pre-school year and lengthen the school day in primary school while raising hours for teaching of foundational skills.

✓ Create standardised quality certifications that set clear benchmarks for content, teaching quality, and learning outcomes of adult learning courses.

✓ Expand opportunities for the unemployed to complete formal VET degrees and further improve coordination between public employment services and local employers.

Recent progress on structural reforms

A 2025 reform of fiscal rules will allow raising spending on defence and public investment. Planning and approval procedures have been simplified and accelerated for renewable energy and grid extension projects. To address labour shortages, skilled migration has been facilitated by introducing a job search visa as well as simplified administrative procedures to receive work permits and visas for migrants with a job offer. A 2023 reform of the basic income support has abolished the prioritisation of job-uptake over training to allow for more fundamental re- and up-skilling of the unemployed. A reform of the federal lobbying register has raised transparency on lobbying to influence regulation. Competition enforcement has been strengthened by introducing a market investigation tool.