Posted by Christian Schiller, Blogger Emeritus
Despite seen by many as still a tad overweight, the German welfare state has actually performed well in recent years, reflecting a major reform effort. The present crisis is hiding those results, but further “weight loss” might be beneficial, and is certainly on the political agenda.
The German Government has just published a new Social Spending Report (“Sozialbericht”). The report is a comprehensive and detailed overview of the Government’s activities with regard to its social policy objectives. It is a 300 pages plus document with a wealth of information on social policies and spending in Germany. The last Social Spending Report dates back to 2006. You can find a German version of the new report on the web site of the German Ministry of Labor and Social Affairs.
Social spending accounts for roughly 1/3 of GDP in Germany. The ratio of social spending of the government and GDP is a good indicator of the redistributional efforts of a government via the expenditure side of the budget. Many OECD countries are at the same high level as Germany or even higher, such as neighboring France and the Scandinavian countries. By contrast, the United States, as is well known, has a much lower ratio. Here, government social spending accounts for only roughly 1/5 of GDP.
In Germany, following reunification, social spending accounted for 27.6 percent of GDP in 1991. In the following years, it grew faster than GDP and climbed up to 32.3 percent in 2003, the highest level so far in German history. At the same time, unemployment reached record levels, a key element behind the high level of social spending. Politicians and the German public got very concerned about these unfortunate developments and the Government decided in 2003 to cut back entitlements in a way never seen before: the so-called Agenda 2010 was launched by the red-green (Social Democrats and the Greens) coalition government under Chancellor Gerhard Schröder. http://en.wikipedia.org/wiki/States_of_Germany
The Agenda 2010 was a series of reforms aimed at cutting back mainly unemployment entitlements and making the labor market more flexible, to improve government finances and reduce unemployment. The series of changes in the labor market known as “Hartz I-IV” started in 2003, with the last step, “Hartz IV” coming into effect in 2005. The changes have altered the face of unemployment benefits and job centers in Germany, and the very nature of the German system of social security.
First, Hartz II reduced the maximum duration a person can receive full unemployment benefits (Arbeitslosengeld I) from 36 months to 12 months and 18 months for older employees, and also made it easier for companies to hire and fire employees.
Second, Hartz IV, by integrating the benefits of the long-term unemployed into the welfare system: (i) reduced the benefits for long-term unemployed (Arbeitslosengeld II) considerably (from as much as 57 percent of their net salary to the usually much lower benefits of the welfare system) and (ii) also made benefits means-tested. Whether someone is eligible for Arbeitslosengeld II now depends on his or her savings and the income of spouse or partner.
Third, another crucial elemental of the reforms was a massive reorganization of the Federal Labor Office, which was modeled after a private placement agency and rechristened as the Federal Job Agency, with responsibility for managing unemployment benefits and finding placements for jobless.
The Agenda 2010 turned out to be a great success. The employment situation improved and social spending declined in the following years to 29.0 percent of GDP in 2008, helping to bring the government budget deficit close to zero.
This year, however, developments have taken a very different turn; the social spending quota skyrocketed to 31.9 percent of GDP. Next year, in 2010, social spending is expected to absorb 32.4 percent of GDP, exceeding slightly the ratio of 2003, when the Agenda 2010 with its painful entitlement cuts was launched.
I draw two conclusions:
First, the savings efforts of the Agenda 2010 have been fully compensated by the effects of the crisis within a year, which should not come as a surprise given the severity of the economic decline in Germany.
Second, the high level of social expenditure, will lead to a new expenditure reform debate in Germany. Chancellor Merkel, who probably will head also the next German government after the election on September 27 this year, has already categorically excluded an upward adjustment in the VAT rate (to say 25 percent) , which is suggested by many to bring about the needed fiscal consolidation following the crisis. Thus fiscal consolidation will focus on the expenditure side. Social spending will be again at the center of the reform discussion.
