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

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---

### A. Introduction — fiscal pressures and investment needs
- Germany faces rising spending pressures from aging and defense, and a need to expand public investment in transport, energy, communications, and other infrastructure.
- Aging-related spending projections (European Commission 2024):
  - Public pension expenditures increase by 0.6 percent of GDP over the next five years and by 0.9 percent of GDP by 2040.
  - Public health expenditures increase by 0.3 percent of GDP over the next five years and by 0.7 percent of GDP by 2040.
- Federal transfers to the pension system are projected to increase by €32 billion by 2030 (0.3 percentage points of GDP using staff’s GDP projections).
- Defense spending likely to rise by 0.3 percent of GDP in the near term to meet NATO targets; the special fund for defense is projected to be committed two-thirds by the end of this year and will expire in 2027.
- Public infrastructure indicators and needs:
  - 10.4 percent of all bridges on federal highways have damage or defects affecting structural stability or creating unsafe traffic flow (rating between 3.0 and 3.4).
  - 1.7 percent of bridges have significant structural impairments (rating between 3.5 and 4.0).
  - Public investment increased 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 bring Germany up to the median of advanced economies.
- Yearly public investment needs to increase by at least 0.2 percent of GDP to meet Germany’s climate targets (Brand and Römer 2022).
- Fiber optic coverage: 28 percent of households in Germany vs. 57 percent in the average EU country (IMF 2024).

### B. Fiscal rule adjustment and limits
- IMF staff recommend considering adjusting the debt-brake rule to allow for a higher deficit to create fiscal room for investment (IMF 2024).
- Rationale:
  - Current debt brake calibration results in an unnecessarily fast pace of debt reduction when debt sustainability risks are low.
  - The debt brake can require excessive adjustment in years like 2024 when the escape clause is not activated.
- Caveats:
  - Adjusting the debt brake would create significant fiscal room but would not be sufficient alone.
  - Credible medium-term fiscal plans and deficit-reducing reforms are needed to offset rising spending pressures and reduce policy uncertainty.
  - Without structural reforms, rising spending pressures could crowd out public investment or require increases in growth-reducing distortionary taxes.
  - Medium-term plans assume substantial increases in pension contribution rates; parallel increases in health insurance contributions could exacerbate labor market distortions.

### C. Germany’s government revenue and expenditure in international comparison
- General observations (2015–19 period):
  - Germany’s general government spent 3.7 percentage points of GDP more than the median advanced economy.
  - Germany’s revenues exceeded the median advanced economy by 5.2 percentage points of GDP.
  - Tax revenues were 1.2 percentage points of GDP lower than the median advanced economy, driven by lower taxes on goods and services and on property.
  - Social contributions were 16.9 percent of GDP in Germany vs. 11.0 percent in other advanced economies (difference of 5.9 percent of GDP).
  - Social benefits expense was 24.0 percent of GDP in Germany vs. the median advanced economy (difference of 8.5 percent of GDP).
  - Compensation of public employees: 7.4 percent of GDP in Germany, 2.7 percentage points below the median advanced economy.
- Selected figures from Table 1 (Percent of GDP; DEU vs. AEs):
  - Revenue: 45.2 (DEU); vs. AEs: 5.2
  - Expense: 43.8 (DEU); vs. AEs: 3.7
  - Tax revenue: 23.7 (DEU); vs. AEs: -1.2
  - on income, profit, capital gains: 12.4 (DEU); vs. AEs: 1.6
  - on goods & services: 10.0 (DEU); vs. AEs: -1.8
  - Social contributions: 16.9 (DEU); vs. AEs: 5.9
  - Social benefits expense: 24.0 (DEU); vs. AEs: 8.5
  - Compensation of empl.: 7.4 (DEU); vs. AEs: -2.7

### D. Option 1 — Finding efficiencies in healthcare spending
- High volumes of healthcare service consumption:
  - 9.8 in-person doctors’ consultations per person in 2019 in Germany vs. 5.9 in France and 3.9 in Denmark.
  - 25 hospital discharges per person in 2019 in Germany vs. 17 in France and 15 in Denmark.
- Excess health spending relative to the median advanced economy:
  - 0.6 percentage points of GDP over 2015–19.
  - 1.1 percentage points of GDP over 2020–22.
- Composition of excess spending (2015–19):
  - 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.
- Potential efficiency measures:
  - Reform pricing structures (e.g., flat-rate fees for reimbursing hospitals) to disincentivize unnecessary procedures; Parliament is debating Krankenhausversorgungsverbesserungsgesetz to change these incentives.
  - Greater use of joint procurement and digitalization of procurement to reduce costs:
    - Public procurement in Germany amounts to some 15 percent of GDP.
    - Procurement is fragmented: about 30,000 decentralized organizations responsible for procurement, including around 11,000 municipalities where 58 percent of public procurement takes place.
    - Existing joint purchasing initiatives: Kaufhaus des Bundes (federal platform); regional joint purchasers include AGKAMED and GDEKK.
  - Drug pricing policy: new medicines are paid for by statutory health insurance as soon as they come onto market in Germany, before prices are negotiated, leading to quicker access but higher cost.

### E. Option 2 — Stabilizing social security finances
- Social benefits and financing gaps:
  - Social benefits were 24 percent of GDP vs. a median of 15.5 percent in advanced economies (GFS database).
  - Financing gap: social benefits expense exceeded social contributions revenue by around 3.8 percent of GDP (social benefits expense 24.0 percent of GDP vs. social contributions 16.9 percent of GDP).
  - The financing gap is covered by federal, state, and local government transfers financed through taxation and other revenues.
- Pension system sustainability:
  - 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 (government’s Pensions Insurance Report 2023):
    - Increase from 18.6 to 20.6 percent by 2030.
    - Increase to 21.1 percent by 2037 (based on assumption that benefit replacement rates would be allowed to rise after 2025 in line with sustainability mechanisms).
  - Government’s Generationenkapital scheme estimated to generate supplementary funding of 0.2 percent of GDP a year from the mid-2030s.
  - Recent plans to keep replacement rates constant until 2039 could put further upward pressure on contribution rates and federal transfers.
- Health insurance finances:
  - Reserves in the health insurance system are set to be exhausted by 2024.
  - Contributions to statutory health insurance increased by 0.3 percentage points in 2023 and are set to increase “considerably” in the future (Bundesbank 2024).
  - Long-term projections for health insurance contribution rates are not publicly available, adding to policy uncertainty.
- Risks:
  - Large increases in both pension and health insurance contribution rates could exacerbate labor market distortions.

### F. Menu of policy options (overview)
- Options focus on measures with limited economic costs or that advance societal objectives (climate, inequality).
- Options presented include:
  - Finding efficiencies in healthcare spending (Section C).
  - Stabilizing the finances of the social security system (Section D).
  - Eliminating environmentally harmful subsidies.
  - Raising revenues from goods and services taxes.
  - Raising property taxes and closing loopholes in inheritance taxes.
  - Earning higher returns on the government’s financial assets.

---

### 12. To put social security finances on a sounder footing, a detailed review could be conducted

### Review of social benefits and pension system sustainability
- Purpose: Identify social benefits that are especially costly and create adverse incentives, focusing on measures that might discourage labor supply.
- Survey evidence: In a December 2023 survey of 126 economists, more than half said that savings could be identified in social welfare, pointing most frequently to basic income and the basic child allowance.
- Cross-country patterns:
  - Health, old age, and survivors’ benefit expenditures are around 2, 1.5, and 1.2 percentage points of GDP higher than those of the median advanced OECD economy.
  - Within old age and survivors’ benefits, gaps against peer countries are driven by old age and survivors’ pensions specifically, rather than other old age or survivors’ benefits.
  - High pension spending mainly reflects Germany’s relatively elderly population, as pension replacement rates are relatively low and the standard retirement age is relatively high compared to other OECD countries.
- Reform options and impacts:
  - Link annual increases in pensions to inflation rather than wages: expected fiscal savings (assuming real wages rise over time) while maintaining pensions’ role as a safety net against old-age poverty; potentially progressive because higher-income individuals tend to live longer and benefit more from rising real pensions.
  - Link retirement ages to life expectancy (as previously recommended by IMF staff, IMF 2019): could help limit future increases in contribution rates and increase elderly labor force participation; retirement ages are already set to increase to 67 by 2031.
  - Evidence: Studies (German Council of Economic Experts 2023; Scientific Advisory Board of the BMWi 2021) find that both reforms could help limit future increases in contribution rates.

### Germany’s in-kind social benefits and cash transfers
- In-kind social benefits:
  - Social benefits in-kind were 8.5 percent of GDP in Germany, compared to 2.5 percent in the median advanced economy.
  - Germany ranks second-highest in advanced economies in terms of social benefits in-kind.
  - Within in-kind benefits, education accounted for the largest share, followed by hospital services, and then physician services and pharmaceuticals.
- Cash social benefits:
  - In 2015–19, social benefits paid in cash amounted to 8.5 percent of GDP in Germany, compared to 6 percent in the median advanced economy — excess spending of 2.5 percentage points of GDP.
- Data sources: OECD Social Expenditure Database; Federal Statistical Office; IMF staff calculations.

---

### Option 3: Eliminating environmentally harmful subsidies — scope and major measures
- Potential savings:
  - Germany could save over 1 percent in GDP a year by eliminating environmentally harmful subsidies, especially in the transport sector (Table 2).
- Definition: Subsidies that distort prices in favor of fossil fuels and boost greenhouse gas emissions; several are also regressive.
- Concentration: Transport sector; three transport-related subsidies account for around half the cost.
- Key transport-related subsidies (estimates from Burger and Bretschneider (2021)):
  - Tax exemption for kerosene fuel in the aviation industry:
    - Estimated cost: €8.4 billion a year.
    - Estimated extra greenhouse gas emissions: equivalent to 26 million tons of carbon dioxide a year.
    - Note: Federal Subsidy Report (Federal Ministry of Finance 2023) reports a smaller value (€584 million 2024) due to a narrower definition; authorities increased the air traffic tax by around €580 million a year from May 2024.
  - Energy tax concession for diesel fuel:
    - Germany taxes diesel at a lower rate than gasoline (65.45 cents a liter for gasoline, compared to 47.04 cents a liter for diesel, under Section 2 of the Energy Tax Act).
    - Estimated cost: €8.2 billion a year.
    - Estimated extra greenhouse gas emissions: equivalent to 3.7 million tons of carbon dioxide a year.
  - Distance allowance (Entfernungspauschale):
    - Estimated cost: €6 billion a year.
    - Estimated extra greenhouse gas emissions: equivalent to 2 million tons of carbon dioxide a year.
    - Distributional effect: Larger for households with higher marginal tax rates and for households that commute further.
- Other environmentally harmful measures and estimated annual costs (Table 2, 2018):
  - Lower VAT on meat and other animal products: €5.2 billion
  - Lower concession electricity and gas charges for public spaces: €3.6 billion
  - Favorable tax treatment for privately used company cars: €3.1 billion
  - Electricity and energy tax reductions for the manufacturing and agriculture sector: €2.9 billion
  - Relief from electricity and energy taxes for certain energy-intensive processes: €1.3 billion
  - Concessions for energy-intensive industry regarding electricity grid fees: €0.6 billion
  - Exemption of agricultural vehicles from the vehicle excise duty: €0.5 billion
  - Tax concession for agricultural diesel fuel: €0.5 billion
  - Total estimated measures: €40.3 billion (in percent of GDP: 1.2)
- Fossil fuel subsidies and short-term crisis measures:
  - Estimated savings from cutting fossil fuel subsidies: about 0.4 percent of GDP once temporary, crisis-related relief measures are phased out.
  - Recommendation: More up-to-date reporting of the government’s fossil fuel subsidies would be helpful.

---

### Option 4: Raising revenues from goods and services taxes (GST/VAT)
- Current 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.
  - This gap existed pre-COVID and widened during the pandemic/energy crisis as VAT rates were lowered for relief.
- Composition of the gap:
  - Excise taxes: 0.4 percentage points of GDP below the median advanced economy.
  - Taxes on financial and capital transactions: 0.3 percentage points below the median advanced economy.
  - Taxes on the use of goods or permission to use goods: 0.3 percentage points below the median advanced economy.
  - Within excise taxes, excise tax rates on beer, wine, and other alcoholic beverages are relatively low in Germany; excise taxes for cigarettes and heating fuel oil are near the median; gasoline and automotive diesel excise taxes appear at the high end among advanced economies.
  - Taxes on the use of vehicles are 0.1 percentage points of GDP below those of the median advanced economy (excluding road tolls or vehicle property taxes).
- VAT specifics:
  - Standard VAT rate: 19 percent in Germany, 2 percentage points below that of the median advanced economy.
  - Pre-pandemic VAT revenues were similar to the median advanced economy, but temporary relief measures caused a drop; there is scope to raise VAT revenues to close the GST revenue gap.

---

### Option 5: Raising property taxes and closing loopholes in inheritance and gift taxes
- 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, compared with 0.8 percent in the median advanced economy.
- Property taxes (broader category including net wealth, estates, inheritances, gifts):
  - 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 and the median advanced economy collected 1.1 percent.
- Ongoing reform:
  - Germany is updating taxable values of all real estate; reform will be revenue-neutral on average because average property tax rates will be lowered; the new property tax comes into force in January 2025.
- Additional revenue opportunity:
  - Closing loopholes in the treatment of property within income and corporate taxes could raise revenue.
  - Example: Real estate companies are exempted from local corporate taxes (Gewerbesteuer), costing the government around €5 billion a year in foregone revenues (OECD 2023).

---

### 21. Germany’s additional tariffs and fees related to real estate do not seem out of line

### Comparison of recurring real estate taxes and subnational tariffs and fees
- Municipal fees in Germany (fees, Gebühren and contributions, Beiträge) cover services including waste and wastewater removal, upgrades to local infrastructure like canals, and street cleaning; they exclude utilities like electricity, heat, and water.
- 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.
- This slight excess appears driven by state governments; local government level fees are in line with the median peer country.
- Compared to all advanced economies, Germany generates 1.2 percentage points of GDP more revenue from subnational tariffs and fees.

### Inheritance and gift taxes: scope to close loopholes
- Overall revenues from inheritance and gift taxes in Germany seem broadly in line with those of other advanced economies.
- Germany collected similar revenues (relative to GDP) as the median advanced economy in the overall category of estate, inheritance, and gifts.
- Germany phased out its taxes on net wealth in 1997.
- Scope to raise revenue by eliminating loopholes in inheritance and gift tax rules:
  - Inheritance and gift tax exemptions for business assets cost up to €10 billion a year (OECD 2023).
  - Alternative: allow recipients to pay the tax in instalments over 30 years, instead of full exemption (example cited: Denmark).

---

### Option 6: Earning higher returns on the government’s assets
- Property income revenue:
  - Germany earned 0.6 percent of GDP in 2015–19 on average, compared to a median of 1 percent across advanced economies.
  - In 2020–22, Germany earned 0.4 percent of GDP on average, and the median advanced economy earned 0.7 percent.
  - Gap of 0.3–0.4 percentage points of GDP driven by a gap in dividend income of 0.2 percentage points and a gap in interest income of 0.1 percentage points.
- Dividend and equity metrics:
  - 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 investments: Germany had equity investments of 17.9 percent of GDP on average over the 2015–19 period, compared to 23.2 percent in the median advanced OECD economy.
  - Dividend yield: Germany’s dividend income of 0.3 percent of GDP divided by equity asset holdings of 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.
- Drivers and further analysis:
  - Lower dividend yields may reflect lower profitability of state-owned entities (see Asatryan and others 2022).
  - Further analysis could examine the source of low profitability and whether policy changes might address it.

---

### Conclusion and policy implications
- The paper identifies a range of measures that could generate substantial fiscal room in Germany, combined with a moderate easing of the debt-brake’s limits:
  - Efficiency gains in healthcare.
  - Stabilizing social security finances through contribution and benefit reforms.
  - Eliminating environmentally harmful subsidies (potentially over 1 percent of GDP a year).
  - Raising goods and services tax revenues to close a 1.8 percentage point of GDP gap.
  - Raising property taxes and closing inheritance/gift tax loopholes.
  - Earning higher returns on government financial assets.
- The appropriate mix depends on public preferences regarding distributional objectives and the role and size of the state.

*Source: sipea2024034, International Monetary Fund (July 1, 2024).*

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

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

### A. Introduction — fiscal pressures and investment needs
- Germany faces rising spending pressures from aging and defense, and a need to expand public investment in transport, energy, communications, and other infrastructure.
- Aging-related spending projections (European Commission 2024):
  - Public pension expenditures increase by 0.6 percent of GDP over the next five years and by 0.9 percent of GDP by 2040.
  - Public health expenditures increase by 0.3 percent of GDP over the next five years and by 0.7 percent of GDP by 2040.
- Federal transfers to the pension system are projected to increase by €32 billion by 2030 (0.3 percentage points of GDP using staff’s GDP projections).
- Defense spending likely to rise by 0.3 percent of GDP in the near term to meet NATO targets; the special fund for defense is projected to be committed two-thirds by the end of this year and will expire in 2027.
- Public infrastructure indicators and needs:
  - 10.4 percent of all bridges on federal highways have damage or defects affecting structural stability or creating unsafe traffic flow (rating between 3.0 and 3.4).
  - 1.7 percent of bridges have significant structural impairments (rating between 3.5 and 4.0).
  - Public investment increased 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 bring Germany up to the median of advanced economies.
- Yearly public investment needs to increase by at least 0.2 percent of GDP to meet Germany’s climate targets (Brand and Römer 2022).
- Fiber optic coverage: 28 percent of households in Germany vs. 57 percent in the average EU country (IMF 2024).

### B. Fiscal rule adjustment and limits
- IMF staff recommend considering adjusting the debt-brake rule to allow for a higher deficit to create fiscal room for investment (IMF 2024).
- Rationale:
  - Current debt brake calibration results in an unnecessarily fast pace of debt reduction when debt sustainability risks are low.
  - The debt brake can require excessive adjustment in years like 2024 when the escape clause is not activated.
- Caveats:
  - Adjusting the debt brake would create significant fiscal room but would not be sufficient alone.
  - Credible medium-term fiscal plans and deficit-reducing reforms are needed to offset rising spending pressures and reduce policy uncertainty.
  - Without structural reforms, rising spending pressures could crowd out public investment or require increases in growth-reducing distortionary taxes.
- Medium-term plans assume substantial increases in pension contribution rates; parallel increases in health insurance contributions could exacerbate labor market distortions.

### C. Germany’s government revenue and expenditure in international comparison
- General observations (2015–19 period):
  - Germany’s general government spent 3.7 percentage points of GDP more than the median advanced economy.
  - Germany’s revenues exceeded the median advanced economy by 5.2 percentage points of GDP.
  - Tax revenues were 1.2 percentage points of GDP lower than the median advanced economy, driven by lower taxes on goods and services and on property.
  - Social contributions were 16.9 percent of GDP in Germany vs. 11.0 percent in other advanced economies (difference of 5.9 percent of GDP).
  - Social benefits expense was 24.0 percent of GDP in Germany vs. the median advanced economy (difference of 8.5 percent of GDP).
  - Compensation of public employees: 7.4 percent of GDP in Germany, 2.7 percentage points below the median advanced economy.
- Selected figures from Table 1 (Percent of GDP; DEU vs. AEs):
  - Revenue: 45.2 (DEU); vs. AEs: 5.2
  - Expense: 43.8 (DEU); vs. AEs: 3.7
  - Tax revenue: 23.7 (DEU); vs. AEs: -1.2
  - on income, profit, capital gains: 12.4 (DEU); vs. AEs: 1.6
  - on goods & services: 10.0 (DEU); vs. AEs: -1.8
  - Social contributions: 16.9 (DEU); vs. AEs: 5.9
  - Social benefits expense: 24.0 (DEU); vs. AEs: 8.5
  - Compensation of empl.: 7.4 (DEU); vs. AEs: -2.7

### D. Option 1 — Finding efficiencies in healthcare spending
- Germany has high combined public and private health spending driven by high volumes of healthcare service consumption:
  - 9.8 in-person doctors’ consultations per person in 2019 in Germany vs. 5.9 in France and 3.9 in Denmark.
  - 25 hospital discharges per person in 2019 in Germany vs. 17 in France and 15 in Denmark.
- Excess health spending relative to the median advanced economy:
  - 0.6 percentage points of GDP over 2015–19.
  - 1.1 percentage points of GDP over 2020–22.
- Composition of excess spending (2015–19):
  - 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.
- Potential efficiency measures:
  - Reform pricing structures (e.g., flat-rate fees for reimbursing hospitals) to disincentivize unnecessary procedures; Parliament is debating Krankenhausversorgungsverbesserungsgesetz to change these incentives.
  - Greater use of joint procurement and digitalization of procurement to reduce costs:
    - Public procurement in Germany amounts to some 15 percent of GDP.
    - Procurement is fragmented: about 30,000 decentralized organizations responsible for procurement, including around 11,000 municipalities where 58 percent of public procurement takes place.
    - Existing joint purchasing initiatives: Kaufhaus des Bundes (federal platform); regional joint purchasers include AGKAMED and GDEKK.
  - Drug pricing policy: new medicines are paid for by statutory health insurance as soon as they come onto market in Germany, before prices are negotiated, leading to quicker access but higher cost.

### E. Option 2 — Stabilizing social security finances
- Germany’s social benefits (2015–19):
  - Social benefits were 24 percent of GDP vs. a median of 15.5 percent in advanced economies (GFS database).
  - Financing gap: social benefits expense exceeded social contributions revenue by around 3.8 percent of GDP (social benefits expense 24.0 percent of GDP vs. social contributions 16.9 percent of GDP).
  - The financing gap is covered by federal, state, and local government transfers financed through taxation and other revenues.
- Pension system sustainability:
  - 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 (government’s Pensions Insurance Report 2023):
    - Increase from 18.6 to 20.6 percent by 2030.
    - Increase to 21.1 percent by 2037 (based on assumption that benefit replacement rates would be allowed to rise after 2025 in line with sustainability mechanisms).
  - Government’s Generationenkapital scheme estimated to generate supplementary funding of 0.2 percent of GDP a year from the mid-2030s.
  - Recent plans to keep replacement rates constant until 2039 could put further upward pressure on contribution rates and federal transfers.
- Health insurance finances:
  - Reserves in the health insurance system are set to be exhausted by 2024.
  - Contributions to statutory health insurance increased by 0.3 percentage points in 2023 and are set to increase “considerably” in the future (Bundesbank 2024).
  - Long-term projections for health insurance contribution rates are not publicly available, adding to policy uncertainty.
- Risks:
  - Large increases in both pension and health insurance contribution rates could exacerbate labor market distortions.

### F. Menu of policy options (overview)
- The chapter identifies options to generate fiscal room through expenditure reductions and revenue increases, focusing on measures where:
  - Economic costs are expected to be limited because the measure does not strongly distort important economic choices or offsets pre-existing distortions; and/or
  - The measure helps achieve societal objectives like mitigating climate change or reducing inequality.
- Options presented include:
  - Finding efficiencies in healthcare spending (Section C).
  - Stabilizing the finances of the social security system (Section D).
  - Eliminating environmentally harmful subsidies.
  - Raising revenues from goods and services taxes.
  - Raising property taxes and closing loopholes in inheritance taxes.
  - Earning higher returns on the government’s financial assets.

*Source: sipea2024034, International Monetary Fund (July 1, 2024).*

### 12.      To put social security finances on a sounder footing, a detailed review could be

### 12.      To put social security finances on a sounder footing, a detailed review could be conducted to identify areas where contributions could be raised or benefits reduced. A full review is beyond the scope of this paper, but a few considerations are presented below.

### Review of social benefits and pension system sustainability
- Purpose: Identify social benefits that are especially costly and create adverse incentives, with a focus on measures that might discourage labor supply.
- Survey evidence: In a December 2023 survey of 126 economists, more than half said that savings could be identified in social welfare, pointing most frequently to basic income and the basic child allowance.
- Cross-country patterns:
  - Health, old age, and survivors’ benefit expenditures are around 2, 1.5, and 1.2 percentage points of GDP higher than those of the median advanced OECD economy.
  - Within old age and survivors’ benefits, gaps against peer countries are driven by old age and survivors’ pensions specifically, rather than other old age or survivors’ benefits (e.g., early retirement pensions, residential care, funeral expenses).
  - High pension spending mainly reflects Germany’s relatively elderly population, as pension replacement rates are relatively low and the standard retirement age is relatively high compared to other OECD countries.
- Reform options and impacts:
  - Link annual increases in pensions to inflation rather than wages: expected fiscal savings (assuming real wages rise over time) while maintaining pensions’ role as a safety net against old-age poverty; potentially progressive because higher-income individuals tend to live longer and benefit more from rising real pensions.
  - Link retirement ages to life expectancy (as previously recommended by IMF staff, IMF 2019): could help limit future increases in contribution rates and increase elderly labor force participation; retirement ages are already set to increase to 67 by 2031.
  - Evidence: Studies (German Council of Economic Experts 2023; Scientific Advisory Board of the BMWi 2021) find that both reforms could help limit future increases in contribution rates.

### Germany’s in-kind social benefits and cash transfers
- In-kind social benefits:
  - Social benefits in-kind were 8.5 percent of GDP in Germany, compared to 2.5 percent in the median advanced economy.
  - Germany ranks second-highest in advanced economies in terms of social benefits in-kind.
  - Within in-kind benefits, education accounted for the largest share, followed by hospital services, and then physician services and pharmaceuticals.
- Cash social benefits:
  - In 2015–19, social benefits paid in cash amounted to 8.5 percent of GDP in Germany, compared to 6 percent in the median advanced economy — excess spending of 2.5 percentage points of GDP.
- Data sources: OECD Social Expenditure Database; Federal Statistical Office; IMF staff calculations.

### Option 3: Eliminating environmentally harmful subsidies — scope and major measures
- Potential savings: Germany could save over 1 percent in GDP a year by eliminating environmentally harmful subsidies, especially in the transport sector (Table 2).
- Definition: Environmentally harmful subsidies include government spending or tax exemptions that distort prices in favor of fossil fuels and boost greenhouse gas emissions; several are also regressive.
- Concentration: Environmentally harmful subsidies in Germany are concentrated in the transport sector; three transport-related subsidies account for around half the cost.

Key transport-related subsidies (estimates from Burger and Bretschneider (2021)):
- Tax exemption for kerosene fuel in the aviation industry:
  - Estimated cost: €8.4 billion a year.
  - Estimated extra greenhouse gas emissions: equivalent to 26 million tons of carbon dioxide a year.
  - Note: Federal Subsidy Report (Federal Ministry of Finance 2023) reports a smaller value (€584 million 2024) due to a narrower definition; authorities increased the air traffic tax by around €580 million a year from May 2024.
- Energy tax concession for diesel fuel:
  - Germany taxes diesel at a lower rate than gasoline (65.45 cents a liter for gasoline, compared to 47.04 cents a liter for diesel, under Section 2 of the Energy Tax Act).
  - Estimated cost: €8.2 billion a year.
  - Estimated extra greenhouse gas emissions: equivalent to 3.7 million tons of carbon dioxide a year.
- Distance allowance (Entfernungspauschale):
  - Description: A tax deduction employees can use to offset commuting costs; allowance for car transport is uncapped, capped at €4,500 for other modes.
  - Estimated cost: €6 billion a year.
  - Estimated extra greenhouse gas emissions: equivalent to 2 million tons of carbon dioxide a year.
  - Distributional effect: Exacerbates inequality because it is larger for households with higher marginal tax rates and for households that commute further (which tends to favor higher-income households).
- Other environmentally harmful measures and estimated annual costs (Table 2, 2018):
  - Lower VAT on meat and other animal products: €5.2 billion
  - Lower concession electricity and gas charges for public spaces: €3.6 billion
  - Favorable tax treatment for privately used company cars: €3.1 billion
  - Electricity and energy tax reductions for the manufacturing and agriculture sector: €2.9 billion
  - Relief from electricity and energy taxes for certain energy-intensive processes: €1.3 billion
  - Concessions for energy-intensive industry regarding electricity grid fees: €0.6 billion
  - Exemption of agricultural vehicles from the vehicle excise duty: €0.5 billion
  - Tax concession for agricultural diesel fuel: €0.5 billion
  - Total estimated measures: €40.3 billion (in percent of GDP: 1.2)
  - Note 1/ in Table 2: Including international flights taking off or landing in Germany.
  - Note 2/ Table notes: Some measures do not exclusively support fossil fuels; electric cars can also benefit from some measures.
  - Sources: Burger and Bretschneider (2021); Federal Ministry of Finance 2023; OECD.

### Fossil fuel subsidies and short-term crisis measures
- Estimated savings from cutting fossil fuel subsidies: about 0.4 percent of GDP once temporary, crisis-related relief measures (e.g., VAT exemptions and the gas price brake) are phased out.
- Comment: Fossil fuel subsidies in Figure 5 likely overlap with the environmentally harmful subsidies in Table 2; Figure 5 and Table 2 use different data sources.
- Recommendation: More up-to-date reporting of the government’s fossil fuel subsidies would be helpful.

### Option 4: Raising revenues from goods and services taxes (GST/VAT)
- Current 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.
  - This gap existed pre-COVID and widened during the pandemic/energy crisis as VAT rates were lowered for relief.
- Composition of the gap:
  - Excise taxes: 0.4 percentage points of GDP below the median advanced economy.
  - Taxes on financial and capital transactions: 0.3 percentage points below the median advanced economy.
  - Taxes on the use of goods or permission to use goods: 0.3 percentage points below the median advanced economy.
  - Within excise taxes, excise tax rates on beer, wine, and other alcoholic beverages are relatively low in Germany; excise taxes for cigarettes and heating fuel oil are near the median; gasoline and automotive diesel excise taxes appear at the high end among advanced economies.
  - Taxes on the use of vehicles are 0.1 percentage points of GDP below those of the median advanced economy (excluding road tolls or vehicle property taxes).
- VAT specifics:
  - Standard VAT rate: 19 percent in Germany, 2 percentage points below that of the median advanced economy.
  - Pre-pandemic VAT revenues were similar to the median advanced economy, but temporary relief measures caused a drop; there is scope to raise VAT revenues to close the GST revenue gap.

### Option 5: Raising property taxes and closing loopholes in inheritance and gift taxes
- 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, compared with 0.8 percent in the median advanced economy.
  - The undercollection in real estate taxes contributes to low overall property tax collection.
- Property taxes (broader category including net wealth, estates, inheritances, gifts):
  - 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 and the median advanced economy collected 1.1 percent.
- Ongoing reform: Germany is updating taxable values of all real estate; reform will be revenue-neutral on average because average property tax rates will be lowered; the new property tax comes into force in January 2025.
- Additional revenue opportunity:
  - Closing loopholes in the treatment of property within income and corporate taxes could raise revenue.
  - Example: Real estate companies are exempted from local corporate taxes (Gewerbesteuer), costing the government around €5 billion a year in foregone revenues (OECD 2023).

_Italic: Source: sipea2024034 (PDF chapter/section) — content as provided._

### 21.      Germany’s additional tariffs and fees related to real estate do not seem out of line

### 21.      Germany’s additional tariffs and fees related to real estate do not seem out of line

### Comparison of recurring real estate taxes and subnational tariffs and fees
- When comparing recurring real estate taxes across countries, it is important to compare non-tax tariffs and fees at the local government level, which can vary substantially across countries.
- In Germany, municipalities charge (fees, Gebühren and contributions, Beiträge) for services including waste and wastewater removal, upgrades to local infrastructure like canals, and street cleaning. These fees do not include fees for utilities like electricity, heat, and water.
- 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 (Figure 7, right panel).
- These slight excess revenues seem to be driven by state governments, because at the local government level, they are in line with the median peer country.
- Given that data are only available for a few countries, this 0.2 percentage point excess is somewhat uncertain and does not seem significantly different from the median economy.
- Note: Countries with a non-federal governance structure obtain less revenue from subnational government tariffs and fees. Compared to all advanced economies, Germany generates 1.2 percentage points of GDP more revenue from subnational tariffs and fees.

### Inheritance and gift taxes: scope to close loopholes
- Overall revenues from inheritance and gift taxes in Germany seem broadly in line with those of other advanced economies.
- Germany collected similar revenues (relative to GDP) as the median advanced economy in the overall category of estate, inheritance, and gifts.
- Germany phased out its taxes on net wealth in 1997.
- Germany has scope to raise revenue by eliminating loopholes in its inheritance and gift tax rules, which can also help address Germany’s relatively high wealth inequality (OECD 2023).
- Closing loopholes also reduces distortionary incentives in the tax code and can therefore be a relatively growth-friendly way to increase tax revenues.
- Example: inheritance and gift tax exemptions for business assets cost up to €10 billion a year (OECD 2023). These include instances where the recipient of large business assets is fully exempt from the tax to avoid having to liquidate the assets (Verschonungsbedarfsprüfung).
- Alternative approach: allow recipients to pay the tax in instalments over 30 years, instead of fully exempting them (example cited: Denmark) (OECD 2023).

### Option 6: Earning higher returns on the government’s assets
- Germany earns less income on its assets than other advanced economies.
- Germany earned 0.6 percent of GDP in 2015–19 on average in “property income revenue,” which includes revenue from interest, dividends, profit withdrawals from quasi-corporations, and rent, compared to a median of 1 percent across advanced economies.
- In the 2020–22 period, Germany earned 0.4 percent of GDP on average, and the median advanced economy earned 0.7 percent.
- The gap of 0.3–0.4 percentage points of GDP in property income is driven by a gap in dividend income of 0.2 percentage points and a gap in interest income of 0.1 percentage points, which was the same in both the 2015–19 and 2020–22 periods.
- In the 2015–19 period, Germany earned dividend income of 0.3 percent of GDP, compared to the median advanced economy which earned 0.5 percent of GDP.
- Drivers of lower dividends in Germany:
  - Smaller equity investments: Germany had equity investments of 17.9 percent of GDP on average over the 2015–19 period, compared to 23.2 percent in the median advanced OECD economy (OECD data).
  - Lower dividend yield on those investments: Germany’s dividend income of 0.3 percent of GDP divided by equity asset holdings of 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.
- These lower dividend yields may reflect lower profitability of state-owned entities in Germany (see Asatryan and others 2022).
- Further analysis could examine the source of this low profitability and whether policy changes might be able to address it.

### Conclusion and policy implications
- The paper has explored a number of options for fiscal measures and reforms that could generate substantial fiscal room in Germany.
- These measures and a moderate easing of the debt-brake’s limits could help generate substantial fiscal room for higher public investment and other priority spending needs, as well as for growth-enhancing tax reforms.
- The appropriate choices among these measures and other options will depend on public preferences across various dimensions, including distributive preferences and views about the appropriate size and role of the state.

*Source: sipea2024034 - 21. Germany’s additional tariffs and fees related to real estate do not seem out of line (selected issues paper).*

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_Source: https://www.imf.org/-/media/files/publications/selected-issues-papers/2024/english/sipea2024034.pdf_