Options for Creating Fiscal Room for Investment and Other Spending Needs: Germany

Selected Issues Papers, August 1, 2024

Source details

Canonical URL: Options for Creating Fiscal Room for Investment and Other Spending Needs: Germany

Germany needs substantially higher levels of public investment while facing rising pension, healthcare, long-term care, and defense expenditures.
Moderately easing national fiscal rules, as recommended by IMF staff, would create some fiscal room but would not be sufficient on its own.
The paper explores options to generate additional fiscal room by reducing public spending and increasing revenues while minimizing associated costs to the economy.

The paper examines areas where Germany’s spending and revenue levels stand out in international comparison.
Options for generating fiscal room include:
- (i) finding efficiencies in healthcare spending;
- (ii) stabilizing the finances of the social security system;
- (iii) eliminating environmentally harmful subsidies;
- (iv) raising revenues from goods and services taxes;
- (v) raising property taxes and closing loopholes in inheritance taxes;
- (vi) earning higher returns on the government’s financial assets.

A combination of measures will be required because easing fiscal rules alone is insufficient.
Recommended approaches emphasize:
- cost-saving efficiencies (notably in healthcare);
- medium- to long-term fiscal stabilization of social security and pension systems;
- revenue-enhancing reforms (goods and services taxes, property and inheritance tax changes);
- subsidy reform to remove environmentally harmful support;
- improved management of government financial assets to increase returns.

The analysis uses international benchmarks to identify where Germany’s spending and revenue levels stand out and to inform options for reallocation and reform.