## 1. Investment Needs Are High and Spending Pressures Will Rise

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### Introduction: fiscal pressures and investment needs
- Germany faces rising medium-term spending pressures from aging and defense, and a need to expand public investment in transport, energy, communications, and other infrastructure.
- Projected aging-related increases (European Commission’s Aging Report 2024):
  - Public pension expenditures increase by 0.6 percent of GDP over the next five years and by 0.9 percent by 2040.
  - Public health expenditures increase by 0.3 percent of GDP over the next five years and by 0.7 percent by 2040.
- Federal transfers to the pension system are projected to increase by €32 billion by 2030, or 0.3 percentage points of GDP using staff’s GDP projections.
- Defense spending is likely to rise by 0.3 percent of GDP in the near term to meet NATO targets.
- Infrastructure condition and investment gaps:
  - Engineering inspections (September 2018): 10.4 percent of all bridges on federal highways have damage/defects affecting structural stability or safety (rating between 3.0 and 3.4); 1.7 percent are in worse condition (rating between 3.5 and 4.0).
  - Public investment rose from 2.3 percent of GDP in 2018 to 2.6 percent in 2023.
  - Public investment would have to increase by around 1 percent of GDP to reach the median of advanced economies.
- Policy-level recommendation:
  - Consider adjusting the debt-brake rule to allow for a higher annual deficit to create room for needed public investment while keeping the debt ratio on a downward trajectory.
  - Any adjustment to the debt brake would not be sufficient on its own; credible medium-term fiscal plans and deficit-reducing structural reforms are also needed.

### Germany’s government revenue and expenditure in international comparison
- Germany’s general government over the 2015–19 period:
  - Spent 3.7 percentage points of GDP more than the median advanced economy.
  - Collected 5.2 percentage points of GDP more revenue than the median advanced economy.
- Key table figures (Percent of GDP; column "DEU" and "vs. AEs"):
  - Revenue: 45.2 (5.2)
  - Tax revenue: 23.7 (-1.2)
    - on income, profit, cap. gains: 12.4 (1.6)
    - on payroll and workforce: 0.0 (0.0)
    - on property: 0.6 (-0.4)
    - on goods & services: 10.0 (-1.8)
    - Other taxes: 0.6 (0.6)
  - Social contributions: 16.9 (5.9)
  - Other revenue: 4.5 (-0.3)
  - Expense: 43.8 (3.7)
    - Compensation of empl.: 7.4 (-2.7)
    - Use of goods & services: 5.0 (-0.7)
    - Consumption of fixed cap.: 2.2 (-0.5)
    - Interest expense: 1.1 (-0.4)
    - Subsidies expense: 0.8 (-0.2)
    - Grants expense: 1.2 (0.3)
    - Social benefits expense: 24.0 (8.5)
    - Other expense: 2.1 (-0.4)
- Interpretation:
  - Higher overall revenues are driven by a large welfare state (high social contributions and social benefits).
  - Tax revenues are lower than the median advanced economy by 1.2 percentage points of GDP, driven by lower taxes on goods and services and on property.
  - Excluding social transfers, most other categories of public expenditure in Germany are below the median advanced economy.

### Option 1: Finding efficiencies in healthcare spending
- Utilization and expenditure drivers:
  - 2019: 9.8 in-person doctors’ consultations per person in Germany, compared with 5.9 in France and 3.9 in Denmark.
  - 2019: Germany discharged 25 patients per person from hospital, compared with 17 in France and 15 in Denmark.
- Excess public health expenditures:
  - Over 2015–19: around 0.6 percentage points of GDP higher than the median advanced economy.
  - During 2020–22: excess increased to 1.1 percentage points of GDP.
  - Over 2015–19, excess decomposed as:
    - Medical products, appliances, and equipment: 0.9 percentage points of GDP higher.
    - Outpatient services: 0.6 percentage points of GDP higher.
    - Germany spends less than the median advanced economy on hospital services.
- Cost-reduction and efficiency options:
  - Reform pricing structures to disincentivize unnecessary procedures (flat-rate hospital reimbursement encourages maximizing the number of patients treated).
  - Increase joint procurement and digitalization:
    - Public procurement in Germany is about 15 percent of GDP.
    - Procurement is fragmented: about 30,000 decentralized organizations handle procurement, including around 11,000 municipalities.
    - Municipalities account for 58 percent of public procurement.
  - Consider drug pricing procedures: new medicines are currently paid for by statutory health insurance as soon as they come onto market, before price negotiations are concluded.

### Option 2: Stabilizing social security finances
- Scale and financing gap:
  - Social benefits (2015–19): 24 percent of GDP, compared with 15.5 percent in the median advanced economy.
  - Social contributions revenues (2015–19): 16.9 percent of GDP in Germany compared with 11.0 percent in other advanced economies.
  - Financing gap between social benefits and social contributions: around 3.8 percent of GDP, covered by government transfers.
- Key social security pressures and projections:
  - Pension system reserves of 1 percent of GDP are expected to be used up by 2028.
  - Government’s Pensions Insurance Report 2023 projected pension contribution rates to increase from 18.6 to 20.6 percent by 2030 and to 21.1 percent by 2037 (assumes replacement rates rise after 2025).
  - Recent plans to keep replacement rates constant until 2039 could put further upward pressure on contribution rates and federal transfers.
  - Government plan (Generationenkapital) estimated to generate only 0.2 percent of GDP a year from the mid-2030s.
  - Health insurance system reserves are set to be exhausted by 2024.
  - After increasing by 0.3 percentage points in 2023, contributions to statutory health insurance are set to increase “considerably” in the future (Bundesbank 2024).
- Policy objective:
  - Stabilize social security finances to reduce reliance on transfers and create fiscal room; options include measures affecting contribution rates, benefit design, and other structural reforms.
- Suggested review areas:
  - Identify social benefits that are especially costly and create adverse incentives, particularly those that might discourage labor supply.
  - December 2023 survey of 126 economists: more than half said that savings could be identified in social welfare, most frequently pointing to basic income and the basic child allowance.

### Pension reform options and expected effects
- Link annual pension increases to inflation rather than wages:
  - Expected to yield fiscal savings (assuming real wages rise over time) while maintaining protection against old-age poverty.
  - May be progressive as higher-income individuals tend to live longer and thus benefit more from rising real pensions.
- Link retirement ages to life expectancy (retirement ages set to increase to 67 by 2031):
  - Could help limit future increases in contribution rates and increase elderly labor force participation.
- Supporting studies referenced in source: German Council of Economic Experts 2023; Scientific Advisory Board of the BMWi 2021.

### Option 3 — Eliminating environmentally harmful subsidies: scope and potential savings
- Aggregate potential:
  - Germany could save over 1 percent of GDP a year by eliminating subsidies that are environmentally harmful.
  - Transport-related subsidies account for around half the cost of all environmentally harmful subsidies in Germany.
- Key transport-related measures and estimates ( Burger and Bretschneider (2021) unless otherwise noted):
  - Tax exemption for kerosene fuel in the aviation industry:
    - Estimated cost: €8.4 billion a year.
    - Estimated extra greenhouse gas emissions: 26 million tons of carbon dioxide a year.
    - Note: Federal Subsidy Report (Federal Ministry of Finance 2023) calculates a smaller value (€584 million 2024) using a narrower definition.
  - Energy tax concession for diesel fuel:
    - Germany diesel tax: 47.04 cents a liter; gasoline: 65.45 cents a liter (under Section 2 of the Energy Tax Act).
    - Estimated cost: €8.2 billion a year.
    - Estimated extra greenhouse gas emissions: 3.7 million tons of carbon dioxide a year.
  - Distance allowance (Entfernungspauschale):
    - Estimated cost: €6 billion a year.
    - Estimated extra greenhouse gas emissions: 2 million tons of carbon dioxide a year.
    - Allows uncapped allowance for car transport while capping other modes at €4,500.
- Table 2 summary (environmentally harmful subsidies, 2018) — measures and estimated annual costs (€ billion):
  - Tax exemption for kerosene fuel in the aviation industry 1/: €8.4
  - Energy tax concession for diesel fuel: €8.2
  - Distance allowance - a tax deduction for commuting to work 2/: €6
  - Lower VAT on meat and other animal products: €5.2
  - Lower concession electricity and gas charges for public spaces: €3.6
  - Favorable tax treatment for privately used company cars 2/: €3.1
  - Electricity and energy tax reductions for the manufacturing and agriculture sector: €2.9
  - Relief from electricity and energy taxes for certain energy-intensive processes a: €1.3
  - Concessions for energy-intensive industry regarding electricity grid fees: €0.6
  - Exemption of agricultural vehicles from the vehicle excise duty: €0.5
  - Tax concession for agricultural diesel fuel: €0.5
  - Total: €40.3
  - Total in percent of GDP: 1.2
- Notes:
  - 1/ Including international flights taking off or landing in Germany.
  - 2/ This measure does not exclusively support fossil fuels (for example, electric cars can also benefit from the measure).
  - 3/ Including reimbursements of the peak equalization charges for manufacturing companies.

### Option 3 — Fossil fuel subsidies
- Estimated savings:
  - Germany could save about 0.4 percent of GDP by cutting fossil fuel subsidies (what is expected to remain after temporary, crisis-related relief measures are phased out).
- Context:
  - The government greatly increased fossil fuel subsidies during the energy crisis of 2022–23 (for example, VAT exemptions and the gas price brake).
  - Recommendation: More up-to-date reporting of the government’s fossil fuel subsidies would be helpful.
  - Note: Fossil fuel subsidies likely overlap with environmentally harmful subsidies in Table 2.

### Option 4 — Raising revenues from goods and services taxes
- Current position and gap:
  - Germany’s goods and services tax revenues are 10 percent of GDP, which is 1.8 percentage points of GDP below those of the median advanced economy.
  - The gap existed before the COVID-19 pandemic but widened during the pandemic and subsequent energy crisis as VAT rates were lowered to provide relief.
- Components driving the gap:
  - Excise taxes: revenues 0.4 percentage points of GDP below the median advanced economy.
  - Taxes on financial and capital transactions: 0.3 percentage points of GDP below the median advanced economy.
  - Taxes on the use of goods (including permission to use goods): 0.3 percentage points of GDP below the median advanced economy.
- Details on VAT and excises:
  - Standard VAT rates: Germany standard VAT rate: 19 percent; median advanced economy standard VAT rate: 21 percent.
  - Excise tax rates are relatively low on beer, wine, and other alcoholic beverages; near median for cigarettes and heating fuel oil; at high end for gasoline and automotive diesel.
  - Taxes on the use of vehicles are 0.1 percentage points of GDP below the median advanced economy.

### Real estate and property tax collection: findings
- Recurring real estate taxes:
  - Germany collected 0.4 percent of GDP in recurring real estate taxes in both the 2015–19 and 2020–22 periods.
  - Median advanced economy collected 0.8 percent of GDP in recurring real estate taxes.
- Broader property taxes:
  - 2015–19: Germany collected 0.6 percent of GDP in property taxes, compared with 1 percent of GDP in the median advanced economy.
  - 2020–22: Germany collected 0.7 percent of GDP in property taxes, and the median advanced economy collected 1.1 percent.
- Policy and reform context:
  - Germany is updating taxable values of all real estate in a reform of its real estate tax; the reform will be revenue-neutral because average property tax rates will be lowered. The new property tax comes into force in January 2025.
  - Real estate companies are exempted from local corporate taxes (Gewerbesteuer), costing the government around €5 billion a year in foregone revenues (OECD 2023).
  - Inheritance and gift tax exemptions for business assets cost up to €10 billion a year (OECD 2023).

### Efficiency, progressivity, and reform options for property taxation
- Land value taxes:
  - Relatively efficient and highly progressive; Germany does not make full use of land value taxes and other recurring real estate taxes.
- Closing loopholes:
  - Closing unnecessary and distortionary loopholes in property treatment within income and corporate taxes could generate revenue (example: Gewerbesteuer exemption for real estate companies).
  - Closing exemptions in inheritance and gift taxes can raise revenue and address wealth inequality; alternative designs include allowing recipients to pay inheritance/gift tax in instalments over 30 years (example cited: Denmark).

### Earnings on government assets: findings and drivers
- Property income revenue:
  - Germany earned 0.6 percent of GDP on average in “property income revenue” in 2015–19 (median advanced economies: 1 percent).
  - 2020–22: Germany earned 0.4 percent of GDP (median advanced economy: 0.7 percent).
- Dividend and interest gaps:
  - Gap in dividend income: 0.2 percentage points of GDP.
  - Gap in interest income: 0.1 percentage points of GDP.
  - 2015–19 dividend income: Germany 0.3 percent of GDP; median advanced economy 0.5 percent of GDP.
- Equity holdings and yields:
  - Germany had equity investments of 17.9 percent of GDP on average over 2015–19; median advanced OECD economy had 23.2 percent of GDP.
  - Dividend yield calculation: Germany’s dividend income (0.3 percent of GDP) divided by equity asset holdings (17.9 percent of GDP) gives a dividend yield of 1.7 percent a year; equivalent figure for the median advanced economy is approximately 2.2 percent.
- Possible explanation: lower profitability of state-owned entities in Germany may contribute to lower dividend yields.

### Financial stability risks from commercial real estate (CRE) and banks’ exposures
- CRE price developments:
  - CRE index declines from peak in early 2022: about 21 percent for the US, about 17 percent for Germany, and about 12 percent for the euro area as a whole.
- Bank exposures and composition:
  - For the 15 German banks in the sample, exposure to CRE amounts to 18 percent of their loan books on average.
  - Nearly ⅔ of this CRE exposure is in Germany.
  - US CRE exposure amounts to nearly 11 percent of these banks’ CRE loan books on average; concentrated in a few large banks.
  - Large universal German banks show higher exposure to multi-family housing loans compared with offices; regional Landesbanks and some mid-range banks and specialized lenders tend to have more exposure to office properties.
- NPLs and LTVs:
  - NPL ratios on German banks’ CRE loans rose to 3.8 percent by end-2023 from about 2 percent at the start of 2023.
  - NPL ratios on US CRE loans rose to 10 percent by end-2023.
  - Reported average LTV ratios: about 80 percent on US CRE loans versus 65 percent on German CRE loans (bank filings).
- Insurers:
  - Insurers’ CRE exposure amounts to 8 percent on average of their asset portfolios.
  - A 25 percent decline in CRE prices applied to insurers’ holdings suggests a 2 percent decline in asset valuations, other factors constant.
  - Insurers’ solvency ratio: 330 percent (life and non-life).
- Simplified IMF staff solvency stress analysis — baseline adverse scenario assumptions and results:
  - Key assumptions:
    - CRE LTVs: 80% German / EU; 85% US
    - CRE NPL ratios: 10% German / EU; 15% US
    - RRE LTV: 85%
    - RRE NPL ratio: 0.8%
    - 100% conversion of NPLs to default
    - Earnings: 30% reduction versus 2023
    - Legal / Operational Costs: 30% of Foreclosure Price
    - Results are net of provisions
  - Findings:
    - Under this 1-year adverse scenario, three banks out of 15 face a capital hit, but they still remain reasonably capitalized (net of provisions and assuming swift recovery on defaults).
  - Sensitivity:
    - If only 50% of NPLs convert to default (bank workout/extensions), only one bank faces a marginal capital hit.
    - Alternative assumptions explored include lower CRE NPL ratios (5% German/EU; 10% US), alternative RRE NPL ratios (0.8% and 1.5%), and different LTV assumptions (e.g., 65% German / 80% US; 85% German / EU; 90% US).
- Caveats not fully captured:
  - Losses on other loan types, additional securities losses, contagion from insurers or asset management subsidiaries, and funding pressures are not fully modeled.
- Comparison to 2023 EBA stress test:
  - 2023 EBA highly adverse 3-year scenario assumptions for Germany:
    - GDP falls cumulatively by 6.4 percentage points
    - Inflation rises by 21 percentage points
    - Unemployment rises by 4 percentage points
    - Residential real estate prices fall by 26 percent
    - Commercial real estate prices fall by 33 percent
  - In that scenario, German banks in the test lose about 6 percentage points in their CET1 capital ratios, which fall to about 9 percent on average at the end of the scenario horizon.

### Covered bonds, market risk, and collateral mechanics
- Covered bonds protections:
  - Holders of covered bonds are not exposed to credit risk of the underlying CRE loans as long as the issuer is not in default.
  - Legal requirement: covered bonds must have at least two percent more in the nominal amount of loan collateral versus par value of bonds issued.
  - CRE loans are eligible as collateral up to 60 percent of a property’s lending value (“Beleihungswert”).
  - Banks typically maintain additional collateral cushions, often as much as 20–30 percentage points above the two percent requirement and diversify collateral across residential/commercial loans.
- Market movements:
  - Spreads on covered bonds widened for some banks during February-March 2024 but largely recovered through early June 2024; corresponding market losses reversed.

### Policy recommendations and actions suggested
- Fiscal and revenue measures:
  - Increase collection of recurring real estate taxes and land value taxes.
  - Close loopholes in corporate and income tax treatments of property (e.g., Gewerbesteuer exemption for real estate companies).
  - Close exemptions and loopholes in inheritance and gift taxes (noting potential to raise up to €10 billion a year from business asset exemptions).
  - Consider mechanisms such as installment payments over 30 years for inheritance/gift taxes on business assets as an alternative to full exemptions.
- Health, procurement, and social security:
  - Reform health pricing and procurement (joint procurement, digitalization) to reduce excess costs.
  - Conduct a comprehensive review of social security finances to identify contribution or benefit adjustments and structural reforms.
- Asset income and state-owned enterprise policy:
  - Examine causes of low dividend yield and lower profitability of state-owned entities and consider policy changes to bolster profitability and dividend flows.
  - Increase equity investments or improve returns on existing equity holdings where feasible.
- Financial stability and supervision:
  - Continue close micro-prudential supervision of banks with high CRE exposure, including to the US.
  - Ensure banks’ provisions remain adequate and be conservative with capital distributions.
  - Review and test mechanisms to address problem banks swiftly; consider facilitating swift debt restructuring mechanisms for troubled developers.
  - Maintain macroprudential buffers (CCyB, SSyRB) and consider adding income-related borrower-based measures such as DTI and DSTI ratios for RRE.
  - Close gaps in CRE data collection on credit underwriting assessments and exposures.
  - Support feasible CRE conversions (commercial to residential) by reducing administrative and legal requirements where appropriate.
- Structural and medium-term measures:
  - Strengthen bank profitability (digitalization, consolidation, income diversification).
  - Progress on a capital markets union (CMU) across the European Union to increase scale economies and create opportunities for non-interest income.

### Conclusion
- The paper identifies numerous fiscal measures and reforms that could generate substantial fiscal room in Germany, including higher real estate taxation, closing tax loopholes, eliminating environmentally harmful and fossil fuel subsidies, reforming health procurement and pricing, and earning higher returns on government assets.
- Combined with a moderate easing of the debt-brake’s limits, these measures could generate substantial fiscal room for higher public investment and other priority spending needs, as well as for growth-enhancing tax reforms.
- Appropriate choices depend on public preferences across distributive dimensions and views about the size and role of the state.

*Source: IMF staff report content as provided in the supplied PDF excerpt.*

### 1. Investment Needs Are High and Spending Pressures Will Rise _______________________ 4

### 1. Investment Needs Are High and Spending Pressures Will Rise _______________________ 4

### Introduction: fiscal pressures and investment needs
- Germany faces rising medium-term spending pressures from aging and defense, and a need to expand public investment in transport, energy, communications, and other infrastructure.
- Projected aging-related increases (European Commission’s Aging Report 2024):
  - Public pension expenditures increase by 0.6 percent of GDP over the next five years and by 0.9 percent by 2040.
  - Public health expenditures increase by 0.3 percent of GDP over the next five years and by 0.7 percent by 2040.
- Federal transfers to the pension system are projected to increase by €32 billion by 2030, or 0.3 percentage points of GDP using staff’s GDP projections.
- Defense spending is likely to rise by 0.3 percent of GDP in the near term to meet NATO targets.
- Infrastructure condition and investment gaps:
  - Engineering inspections (September 2018): 10.4 percent of all bridges on federal highways have damage/defects affecting structural stability or safety (rating between 3.0 and 3.4); 1.7 percent are in worse condition (rating between 3.5 and 4.0).
  - Public investment rose from 2.3 percent of GDP in 2018 to 2.6 percent in 2023.
  - Public investment would have to increase by around 1 percent of GDP to reach the median of advanced economies.
- Policy-level recommendation:
  - Consider adjusting the debt-brake rule to allow for a higher annual deficit to create room for needed public investment while keeping the debt ratio on a downward trajectory.
  - Any adjustment to the debt brake would not be sufficient on its own; credible medium-term fiscal plans and deficit-reducing structural reforms are also needed to offset rising pressures and avoid crowding out priority expenditures.

### Germany’s government revenue and expenditure in international comparison
- Germany’s general government over the 2015–19 period:
  - Spent 3.7 percentage points of GDP more than the median advanced economy.
  - Collected 5.2 percentage points of GDP more revenue than the median advanced economy, reflecting a smaller fiscal deficit.
- Key table figures (Percent of GDP; column "DEU" and "vs. AEs"):
  - Revenue: 45.2 (5.2)
  - Tax revenue: 23.7 (-1.2)
    - on income, profit, cap. gains: 12.4 (1.6)
    - on payroll and workforce: 0.0 (0.0)
    - on property: 0.6 (-0.4)
    - on goods & services: 10.0 (-1.8)
    - Other taxes: 0.6 (0.6)
  - Social contributions: 16.9 (5.9)
  - Other revenue: 4.5 (-0.3)
  - Expense: 43.8 (3.7)
    - Compensation of empl.: 7.4 (-2.7)
    - Use of goods & services: 5.0 (-0.7)
    - Consumption of fixed cap.: 2.2 (-0.5)
    - Interest expense: 1.1 (-0.4)
    - Subsidies expense: 0.8 (-0.2)
    - Grants expense: 1.2 (0.3)
    - Social benefits expense: 24.0 (8.5)
    - Other expense: 2.1 (-0.4)
- Interpretation notes:
  - Germany’s higher overall revenues are driven by a large welfare state (high social contributions and social benefits).
  - Tax revenues are lower than the median advanced economy by 1.2 percentage points of GDP, driven by lower taxes on goods and services and on property.
  - Excluding social transfers, most other categories of public expenditure in Germany are below the median advanced economy (e.g., compensation of public sector employees is 2.7 percentage points of GDP below the median).

### Option 1: Finding efficiencies in healthcare spending
- Germany has a high share of combined public and private health spending in GDP, driven primarily by high volumes of healthcare service consumption rather than prices.
  - In 2019: 9.8 in-person doctors’ consultations per person in Germany, compared with 5.9 in France and 3.9 in Denmark.
  - In 2019: Germany discharged 25 patients per person from hospital, compared with 17 in France and 15 in Denmark.
- Excess public health expenditures (deviation from median advanced economy):
  - Over 2015–19: around 0.6 percentage points of GDP higher.
  - During 2020–22: excess increased to 1.1 percentage points of GDP.
  - Over 2015–19, excess decomposed as:
    - Medical products, appliances, and equipment: 0.9 percentage points of GDP higher than the median advanced economy.
    - Outpatient services: 0.6 percentage points of GDP higher than the median advanced economy.
    - Germany spends less than the median advanced economy on hospital services.
- Cost-reduction and efficiency options identified:
  - Reform pricing structures to disincentivize unnecessary procedures (flat-rate hospital reimbursement encourages maximizing the number of patients treated).
  - Increase joint procurement and digitalization of procurement to reduce costs:
    - Public procurement in Germany is about 15 percent of GDP.
    - Procurement is fragmented: about 30,000 decentralized organizations handle procurement, including around 11,000 municipalities.
    - Municipalities account for 58 percent of public procurement.
  - Consider drug pricing procedures: new medicines are currently paid for by statutory health insurance as soon as they come onto market, before price negotiations are concluded—this provides quicker access but at higher cost.

### Option 2: Stabilizing social security finances
- Germany’s social welfare scale and financing gap:
  - Social benefits (2015–19): 24 percent of GDP, compared with 15.5 percent in the median advanced economy.
  - Social contributions revenues (2015–19): 16.9 percent of GDP in Germany compared with 11.0 percent in other advanced economies.
  - Financing gap between social benefits and social contributions: around 3.8 percent of GDP, covered by federal, state, and local government transfers financed through taxation and other revenues.
- Policy objective:
  - Stabilize social security finances to reduce reliance on transfers and create fiscal room; options include measures affecting contribution rates, benefit design, and other structural reforms (not exhaustively listed here).

*Source: 1deuea2024002 - 1. Investment Needs Are High and Spending Pressures Will Rise (July 1, 2024).*

### 11.      Even with government transfers, there is uncertainty around the long-term financial

### 11.      Even with government transfers, there is uncertainty around the long-term financial

### Long-term sustainability of social security: key projections and uncertainties
- Pension system reserves of 1 percent of GDP are expected to be used up by 2028.
- After reserves are used up, contribution rates are set to increase substantially:
  - Government’s Pensions Insurance Report 2023 projected pension contribution rates to increase from 18.6 to 20.6 percent by 2030 and to 21.1 percent by 2037, based on the assumption that benefit replacement rates would be allowed to rise after 2025 in line with the pension system’s sustainability mechanisms.
  - Recent plans to keep replacement rates constant until 2039 could put further upward pressure on contribution rates and federal transfers to the system.
- Government plan (Generationenkapital) to build up pension assets is estimated to generate only supplementary funding of 0.2 percent of GDP a year from the mid-2030s.
- Health insurance system reserves are set to be exhausted by 2024.
- After increasing by 0.3 percentage points in 2023, contributions to statutory health insurance are set to increase “considerably” in the future (Bundesbank 2024).
- Long-term projections for health insurance contribution rates are not publicly available, increasing policy uncertainty.
- Large increases in both pension and health insurance contribution rates could exacerbate labor market distortions.

### Policy recommendation: comprehensive review of social security finances
- Conduct a detailed review to identify areas where contributions could be raised or benefits reduced; a full review is beyond the scope of this paper but considerations include:
  - Identify social benefits that are especially costly and create adverse incentives, particularly those that might discourage labor supply.
  - December 2023 survey of 126 economists: more than half said that savings could be identified in social welfare, most frequently pointing to basic income and the basic child allowance.

### Findings from cross-country comparisons of social benefits
- Categories where Germany stands out relative to other countries:
  - Health benefits: around 2 percentage points of GDP higher than the median advanced OECD economy.
  - Old age benefits: around 1.5 percentage points of GDP higher than the median advanced OECD economy.
  - Survivors’ benefits: around 1.2 percentage points of GDP higher than the median advanced OECD economy.
- Within old age and survivors’ benefits, gaps are driven by old age and survivors’ pensions specifically, rather than other old age or survivors’ benefits like early retirement pensions, residential care, or funeral expenses.
- High levels of pension spending mainly reflect Germany’s relatively elderly population; pension replacement rates are relatively low and the standard retirement age is relatively high compared to other OECD countries.
- Social benefits in-kind:
  - Germany: 8.5 percent of GDP in social benefits in-kind.
  - Median advanced economy: 2.5 percent of GDP in social benefits in-kind.
  - Germany ranks second-highest in advanced economies in terms of these benefits.
  - Composition: Education largest share, followed by hospital services, then physician services and pharmaceuticals.
- Cash social benefits (2015–19): Germany 8.5 percent of GDP vs median advanced economy 6 percent of GDP, excess spending of 2.5 percentage points of GDP.

### Pension reform options and expected effects
- Link annual pension increases to inflation rather than wages:
  - Expected to yield fiscal savings (assuming real wages rise over time) while maintaining protection against old-age poverty.
  - May be progressive as higher-income individuals tend to live longer and thus benefit more from rising real pensions.
- Link retirement ages to life expectancy (already recommended by IMF staff previously and retirement ages set to increase to 67 by 2031):
  - Could help limit future increases in contribution rates and increase elderly labor force participation.
- Studies cited: German Council of Economic Experts 2023; Scientific Advisory Board of the BMWi 2021.

### Option 3 — Eliminating environmentally harmful subsidies: scope and potential savings
- Germany could save over 1 percent of GDP a year by eliminating subsidies that are environmentally harmful, especially in the transport sector.
- Environmentally harmful subsidies include government spending or tax exemptions that distort prices in favor of fossil fuels and boost greenhouse gas emissions; some are regressive and exacerbate income inequality.
- Transport-related subsidies account for around half the cost of all environmentally harmful subsidies in Germany.

Key transport-related measures and estimates (Burger and Bretschneider (2021) unless otherwise noted):
- Tax exemption for kerosene fuel in the aviation industry:
  - Estimated cost: €8.4 billion a year.
  - Estimated extra greenhouse gas emissions: 26 million tons of carbon dioxide a year.
  - Note: Federal Subsidy Report (Federal Ministry of Finance 2023) calculates a smaller value (€584 million 2024) using a narrower definition; increasing the air traffic tax by around €580 million a year from May 2024 will have limited effect on incentives for fuel efficiency because it is small and not linked to each company’s consumption of kerosene.
- Energy tax concession for diesel fuel:
  - Germany diesel tax: 47.04 cents a liter; gasoline: 65.45 cents a liter (under Section 2 of the Energy Tax Act).
  - Estimated cost: €8.2 billion a year.
  - Estimated extra greenhouse gas emissions: 3.7 million tons of carbon dioxide a year.
- Distance allowance (Entfernungspauschale):
  - Estimated cost: €6 billion a year.
  - Estimated extra greenhouse gas emissions: 2 million tons of carbon dioxide a year.
  - Allows uncapped allowance for car transport while capping other modes at €4,500; favors car transport, longer commutes, and higher-income households (larger for households with higher marginal tax rates and longer commutes).

Table 2 (summary of environmentally harmful subsidies, 2018) — measures and estimated annual costs:
- Tax exemption for kerosene fuel in the aviation industry 1/: €8.4
- Energy tax concession for diesel fuel: €8.2
- Distance allowance - a tax deduction for commuting to work 2/: €6
- Lower VAT on meat and other animal products: €5.2
- Lower concession electricity and gas charges for public spaces: €3.6
- Favorable tax treatment for privately used company cars 2/: €3.1
- Electricity and energy tax reductions for the manufacturing and agriculture sector: €2.9
- Relief from electricity and energy taxes for certain energy-intensive processes a: €1.3
- Concessions for energy-intensive industry regarding electricity grid fees: €0.6
- Exemption of agricultural vehicles from the vehicle excise duty: €0.5
- Tax concession for agricultural diesel fuel: €0.5
- Total: €40.3
- Total in percent of GDP: 1.2

Notes from table:
- 1/ Including international flights taking off or landing in Germany.
- 2/ This measure does not exclusively support fossil fuels (for example, electric cars can also benefit from the measure).
- 3/ Including reimbursements of the peak equalization charges for manufacturing companies.

### Option 3 — Fossil fuel subsidies
- Germany could save about 0.4 percent of GDP by cutting fossil fuel subsidies.
- The government greatly increased fossil fuel subsidies during the energy crisis of 2022–23 (for example, VAT exemptions and the gas price brake).
- The estimated savings of 0.4 percent of GDP are what is expected to remain after temporary, crisis-related relief measures are phased out.
- Recommendation: More up-to-date reporting of the government’s fossil fuel subsidies would be helpful.
- Note: Fossil fuel subsidies likely overlap with environmentally harmful subsidies in Table 2; Figure 5 and Table 2 come from different data sources.

### Option 4 — Raising revenues from goods and services taxes
- Germany’s goods and services tax revenues are 10 percent of GDP, which is 1.8 percentage points of GDP below those of the median advanced economy.
- The gap existed before the COVID-19 pandemic but widened during the pandemic and subsequent energy crisis as VAT rates were lowered to provide relief.
- Components driving the gap in goods and services tax revenues:
  - Excise taxes: revenues 0.4 percentage points of GDP below the median advanced economy.
  - Taxes on financial and capital transactions: 0.3 percentage points of GDP below the median advanced economy.
  - Taxes on the use of goods (including permission to use goods): 0.3 percentage points of GDP below the median advanced economy.
- Within excise taxes, Germany’s excise tax rates are relatively low on beer, wine, and other alcoholic beverages; by contrast, excise tax rates for cigarettes and heating fuel oil are near the median, and those for gasoline and automotive diesel are at the high end among advanced economies.
- Within the category of taxes on the use of goods, taxes on the use of vehicles are 0.1 percentage points of GDP below the median advanced economy.
- Standard VAT rates:
  - Germany standard VAT rate: 19 percent.
  - Median advanced economy standard VAT rate: 21 percent.
  - There is scope to raise VAT revenues to help close the goods and services tax revenue gap.

_Italic: Source: IMF staff summary of chapter content._

### 19.      Germany could increase its collection of taxes on real estate. It is a well-known result in

### 1deuea2024002 - 19.      Germany could increase its collection of taxes on real estate. It is a well-known result in

### Real estate and property tax collection: findings
- Germany collected 0.4 percent of GDP in recurring real estate taxes in both the 2015–19 and 2020–22 periods.
- The median advanced economy collected 0.8 percent of GDP in recurring real estate taxes (comparison period unspecified in source).
- In the 2015–19 period, Germany collected 0.6 percent of GDP in property taxes (broader category including taxes on net wealth, estates, inheritances, and gifts), compared with 1 percent of GDP in the median advanced economy.
- In the 2020–22 period, Germany collected 0.7 percent of GDP in property taxes, and the median advanced economy collected 1.1 percent.
- Germany is updating taxable values of all real estate in a reform of its real estate tax; the reform will be revenue-neutral because average property tax rates will be lowered. The new property tax comes into force in January 2025.
- Real estate companies are exempted from local corporate taxes (Gewerbesteuer), costing the government around €5 billion a year in foregone revenues (OECD 2023).
- German state and local government revenues from tariffs and fees are 0.2 percentage points of GDP higher than those of the median advanced economy with a federal governance structure.
  - Compared to all advanced economies, Germany generates 1.2 percentage points of GDP more revenue from subnational government tariffs and fees (note in source).
- Inheritance and gift tax exemptions for business assets cost up to €10 billion a year (OECD 2023).

### Analysis of efficiency, progressivity, and reform options
- Land value taxes:
  - Are relatively efficient because they are difficult to avoid by changing economic behavior and thus do not significantly distort economic activity.
  - Are highly progressive because landowners tend to be wealthy, and thus can help reduce inequality.
  - Germany does not make full use of land value taxes and other recurring real estate taxes, as evidenced by lower collection relative to peers.
- Closing loopholes and reforming tax treatment:
  - Closing unnecessary and distortionary loopholes in the treatment of property within income and corporate taxes could generate revenue (example: Gewerbesteuer exemption for real estate companies).
  - Closing loopholes in inheritance and gift taxes can raise revenue and address wealth inequality; exemptions for business assets are a substantial revenue forgone (up to €10 billion a year).
  - Alternative policy design: allowing recipients to pay inheritance/gift tax in instalments over 30 years (example cited: Denmark) instead of full exemption.

### Local tariffs, fees, and distributional notes
- Municipal fees (Gebühren and Beiträge) in Germany include charges for waste and wastewater removal, upgrades to local infrastructure like canals, and street cleaning; they exclude utilities like electricity, heat, and water.
- Excess revenues from tariffs and fees appear driven by state governments; at the local government level, German fees are in line with the median peer country.
- Data limitations: the 0.2 percentage point excess in tariffs and fees is somewhat uncertain due to limited country coverage.

### Earnings on government assets: findings and drivers
- Germany earned 0.6 percent of GDP on average in “property income revenue” in 2015–19 (includes interest, dividends, profit withdrawals from quasi-corporations, and rent), compared to a median of 1 percent across advanced economies.
- In 2020–22, Germany earned 0.4 percent of GDP on average in property income revenue, and the median advanced economy earned 0.7 percent.
- The gap in property income of 0.3–0.4 percentage points of GDP is driven by:
  - A gap in dividend income of 0.2 percentage points of GDP.
  - A gap in interest income of 0.1 percentage points of GDP.
- Example: in 2015–19 Germany earned dividend income of 0.3 percent of GDP, compared to the median advanced economy which earned 0.5 percent of GDP.
- Equity investment holdings:
  - Germany had equity investments of 17.9 percent of GDP on average over 2015–19.
  - The median advanced OECD economy had equity investments of 23.2 percent of GDP.
- Dividend yield calculation:
  - Germany’s dividend income (0.3 percent of GDP) divided by equity asset holdings (17.9 percent of GDP) gives a dividend yield of 1.7 percent a year.
  - The equivalent figure for the median advanced economy is approximately 2.2 percent.
- Possible explanation: lower profitability of state-owned entities in Germany may contribute to lower dividend yields (reference: Asatryan and others 2022). Further analysis could examine sources of low profitability and potential policy responses.

### Financial stability risks from commercial real estate (CRE): findings
- CRE price developments:
  - The CRE index is down about 21 percent from its peak in early 2022 for the US, about 17 percent for Germany, and about 12 percent for the euro area as a whole.
- CRE composition and measurement caveats:
  - Index composition, index construction methodology, and the nature of CRE loans differ across countries, complicating cross-country comparisons.
- Delinquencies and NPLs:
  - NPL ratios on German banks’ CRE loans rose sharply to 3.8 percent by end-2023 from about 2 percent at the start of 2023.
  - NPL ratios on German banks’ CRE loans in the US rose to 10 percent by end-2023.
  - Reported average loan-to-value (LTV) ratios: about 80 percent on US CRE loans versus 65 percent on German CRE loans (bank filings).
  - Defaults have not yet increased correspondingly because banks have worked with borrowers (extending maturities or adjusting loan terms).
- Systemic assessment and uncertainties:
  - The paper finds systemic risks are contained but some individual institutions may be at risk of capital loss that could push them near minimum capital requirements.
  - Estimates are subject to uncertainty due to assumptions and data gaps (exclusive focus on real estate exposures; data inconsistencies in CRE definitions).
  - Top 15 German banks with CRE exposure represent about half of the banking system’s CRE loans (sample excludes German subsidiaries of foreign banks).

### Policy recommendations and actions suggested
- Tax and revenue measures:
  - Increase collection of recurring real estate taxes and land value taxes to capture efficiency and progressivity benefits.
  - Close loopholes in corporate and income tax treatments of property (e.g., Gewerbesteuer exemption for real estate companies).
  - Close exemptions and loopholes in inheritance and gift taxes (noting potential to raise up to €10 billion a year from business asset exemptions).
  - Consider mechanisms such as installment payments over 30 years for inheritance/gift taxes on business assets as an alternative to full exemptions.
- Asset income and state-owned enterprise policy:
  - Examine causes of low dividend yield and lower profitability of state-owned entities and consider policy changes to bolster profitability and dividend flows.
  - Increase equity investments or improve returns on existing equity holdings where feasible.
- Financial stability and supervision:
  - Continue close supervision of financial institutions with CRE exposures.
  - Ensure adequate provisions against potential loan deterioration.
  - Maintain macroprudential buffers.
  - Review and test financial safety arrangements.
  - Consider measures to bolster banking system earnings over the longer term to support capital buffers.

### Conclusion (summary)
- The paper explores numerous fiscal measures and reforms that could generate substantial fiscal room in Germany, including higher real estate taxation, closing tax loopholes, and earning higher returns on government assets.
- Combined with a moderate easing of the debt-brake’s limits, these measures could generate substantial fiscal room for higher public investment and other priority spending needs, as well as for growth-enhancing tax reforms.
- Appropriate choices depend on public preferences across distributive dimensions and views about the size and role of the state.

*Source: IMF staff report content as provided in the supplied PDF excerpt.*

### 7.      German banks carry significant loan exposure to CRE in Germany as well as abroad,

### 7. German banks carry significant loan exposure to CRE in Germany as well as abroad, principally in the US.

### Summary of exposures and sectoral composition
- For the 15 German banks in the sample, exposure to CRE amounts to 18 percent of their loan books on average.
- Nearly ⅔ of this CRE exposure is in Germany.
- US CRE exposure amounts to nearly 11 percent of these banks’ CRE loan books on average; this exposure is concentrated in a few large banks.
- Large universal German banks’ CRE loan books show higher exposure to multi-family housing loans compared with offices (based on available data).
- Regional Landesbanks and some mid-range banks and specialized lenders tend to have more exposure to office properties compared with multi-family loans.
- The performance of CRE in Germany’s largest cities has differed somewhat from that in the rest of the country.

### Insurers’ CRE exposure and potential impact
- Insurers’ CRE exposure amounts to 8 percent on average of their asset portfolios.
- Insurers typically hold physical CRE assets rather than loan exposures and may be sitting on long-term capital gains depending on how long assets were held.
- Applying a stressed impact of some 25 percent decline in CRE prices to insurers’ holdings suggests a 2 percent decline in asset valuations, other factors being constant.
- The 2 percent decline has a modest impact on insurers’ high solvency ratio of 330 percent (life and non-life).
- Insurers may also hold equity or corporate bonds of CRE-related firms; the extent of price deterioration for those exposures is harder to judge given available information.

### Aggregate table (as reported)
- Aggregate38217.215.110821,944   1.0               443          355           18               66            11           23
- (percent of CRE exposure)

### Simplified IMF staff solvency stress analysis — baseline adverse scenario and results
Key scenario assumptions:
- CRE LTVs: 80% German / EU; 85% US
- CRE NPL ratios: 10% German / EU; 15% US
- RRE LTV: 85%
- RRE NPL ratio: 0.8%
- 100% conversion of NPLs to default
- Earnings: 30% reduction versus 2023
- Legal / Operational Costs: 30% of Foreclosure Price
- Results are net of provisions
- No further realized market losses on securities
- Earnings are assumed to be fully reinvested in some runs and excluded in others (results shown for both cases)

Findings:
- Under this 1-year adverse scenario (NPL ratio rises to 10% on German/EU CRE and 15% on US CRE, all NPLs go into default, 30% reduction in 2023 earnings), three banks out of 15 face a capital hit, but they still remain reasonably capitalized.
- This result is net of banks’ provisions and assumes swift recovery on defaulted loans.
- Legal and operational costs associated with foreclosure are assumed to be 30 percent of the foreclosure price to reflect missed interest payments during foreclosure.
- LTV buffers are assumed higher than banks’ reported figures to account for stale valuations or further near-term CRE price declines.

Sensitivity and alternative assumptions:
- If only 50% of NPLs convert to default (bank workout/extensions), the capital impact is less severe: only one bank faces a marginal capital hit.
- Other assumption changes affecting outcomes include LTV cushions on German and US CRE, peak NPL impacts on German banks’ CRE exposure, and potentially higher RRE loan losses.
- Additional scenario variations explored in the analysis include lower CRE NPL ratios (5% German/EU; 10% US), alternative RRE NPL ratios (0.8% and 1.5%), and different LTV assumptions (e.g., 65% German / 80% US; 85% German / EU; 90% US).

### Caveats and factors not fully captured in the simplified stress
- Losses on other types of loans: The scenario does not assume deterioration in NPL ratios for non-real-estate household or corporate loans. CRE deterioration could cause knock-on effects in related industries or a broader downturn increasing unemployment and stressing other loan portfolios.
- Securities losses: The scenario does not assume additional realized losses on banks’ securities holdings. The Bundesbank noted in its 2023 FSR that nearly ⅔ of banks had unrealized losses on securities amounting to 15 percent of par; by Q1 2024 Bundesbank estimates unrealized losses had declined to ⅓ of the earlier estimate due to pull-to-par effects.
- Contagion: Potential contagion from insurers or asset management subsidiaries within banking groups is not modeled.
- Funding pressures: The scenario assumes some decline in earnings versus 2023 but does not assume a dramatic increase in funding costs that could occur in highly adverse scenarios.

### Comparison to 2023 EBA stress test
- The 2023 EBA stress test applied a highly adverse hypothetical 3-year scenario for Germany:
  - GDP falls cumulatively by 6.4 percentage points
  - Inflation rises by 21 percentage points
  - Unemployment rises by 4 percentage points
  - Residential real estate prices fall by 26 percent
  - Commercial real estate prices fall by 33 percent
- In that scenario, German banks included in the test lose about 6 percentage points in their CET1 capital ratios, which fall to about 9 percent on average at the end of the scenario horizon.
- Such impact would erode macroprudential and systemic institution buffers for most banks included; impact on banks not included in the test (especially those with high CRE exposures) is uncertain.

### Covered bonds and market risk
- Holders of covered bonds are not exposed to credit risk of the underlying CRE loans as long as the issuer is not in default; covered bond holders are protected from bail-in and have full recourse to collateral in issuer default.
- Legal requirements: covered bonds must have at least two percent more in the nominal amount of loan collateral versus par value of bonds issued.
- CRE loans are eligible as collateral up to 60 percent of a property’s lending value (“Beleihungswert”).
- Banks typically maintain additional collateral cushions, often as much as 20–30 percentage points above the two percent requirement, diversify collateral across residential/commercial loans, and add high-quality liquid assets for liquidity protection.
- Spreads on covered bonds widened for some banks during February-March 2024 but largely recovered through early June 2024; corresponding market losses reversed.

### Policy recommendations
- Continued close micro-prudential supervision:
  - Close supervision of banks with high CRE exposure, including to the US, is appropriate.
  - Authorities should ensure banks’ provisions remain adequate.
  - Banks should be conservative with capital distributions; authorities should restrict distributions as warranted by potential losses relative to provisions and buffers.
- Review of financial safety arrangements:
  - Review and test mechanisms to address problem banks swiftly (prompt corrective action, bridge bank protocols, public communication, timely deposit payout arrangements).
  - Consider facilitating swift debt restructuring mechanisms for troubled developers, potentially using online technology to link debtors and creditors.
- Assessment of macroprudential buffers:
  - Continue to maintain existing macroprudential buffers, including the CounterCyclical Capital Buffer (CCyB) and the Sectoral Systemic Risk Buffer (SSyRB) for loans secured by RRE.
  - Consider adding income-related borrower-based measures such as debt-to-income (DTI) and debt service-to-income (DSTI) ratios for RRE to the toolkit.
  - Close gaps in CRE data collection on credit underwriting assessments and exposures.
- Support for CRE conversions to other uses:
  - Where conversion of CRE (e.g., commercial to residential) is feasible, authorities could support private sector initiatives by reducing administrative and legal requirements (for example, easing zoning restrictions), while recognizing technical, legal, and operational challenges (plumbing, ventilation, zoning).
- Medium-term structural measures to strengthen financial stability:
  - Strengthen structurally low profitability of banks (digitalization of services, consolidation to reduce operational overhead and increase income diversification).
  - Progress on a capital markets union (CMU) across the European Union could increase scale economies and create opportunities for banks to expand non-interest income sources (investment banking, asset management).

*International Monetary Fund (chapter content).*

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_Source: https://www.imf.org/-/media/files/publications/cr/2024/english/1deuea2024002.pdf_