Germany - Cuts Watch - Oct 2011

Authors: 
David Hall
Date published: 
Nov 2011

Download PDF version of this brief here: http://www.psiru.org/sites/default/files/Germany-cwbrief-Oct2011.pdf 

 Cuts Watch brief

Last updated: 23 November 2011

Author: David Hall

 Germany

1.   Policy

The recession originally hit Germany hard, and the German government responded with a massive stimulus programme in 2009, which included €5billion of public spending to support short-time working (‘Kurzarbeit’) by paying workers 2/3 of their lost wages and half or more of employers’ social security contributions. Over 1.5 million workers were supported by this scheme, and unemployment levels in Germany remained lower than before the crisis. 

 

This enabled the German economy to recover quicker than others. The response of the government in 2010 was to prioritise cutting public spending. A constitutional amendment was introduced in May 2010 which limits the deficit of the federal (central) government to 0.35% of GDP, with effect from 2016, and prohibits the lander (regional governments) from having any deficit at all from 2020.  These constraints are even more severe than the EU limit of 3% of GDP

 

The government then introduced in June 2010 one of the biggest packages of cuts in public spending in the last 60 years (known as the Zukunftspaket -  “Package for the Future” -through the Supplementary Budget Act (2011) and the medium-term Financial Plan (2010–2014)). It provides for cuts of €80billion euros by 2014, equivalent to about 0.8% of GDP, and expected further cuts will be needed to reduce the deficit to 0.35% in 2016.

 

More than one-third of the package consists of cuts in social security benefits. There are also cuts in the defence budget and cuts in public service employment. There was also an increase in some taxes, such as a levy on airlines, a tax on nuclear energy, and a proposed financial transactions tax.  

 

The government has refused to alter the planned cuts despite tax revenues being higher than expected in 2010 and 2011. In one year, the government budget deficit fell from -4.3% in 2010 to -0.8% in 2011 – the target for 2014. Continuing with the cuts package means further reduction in demand. In  October 2011, economists sharply reduced their growth forecasts for Germany for 2011 from 2.9% TO 0.8%.

2.   Jobs and pay

About 15,000 public sector jobs will be lost as a result of the cut of 10,000 posts by 2014, and ‘efficiency gains’ in public administration and public healthcare. There is also a freeze on the Christmas bonus of public employees from 2011 onwards.

 

Yet many argue that the pay of German workers need to rise in order to increase demand and help stave off recession. Since the year 2000, despite relative economic prosperity, wages and salaries in Germany as a whole have not risen at all in real terms, unlike those in other European countries.

Source: Spiegel Online 09/08/2010 Despite Boom, Little Hope of Big Pay Hikes in Germany

 

3.   Effects of austerity

The main elements of the package are cuts in public employment and cuts in social security benefits. It is deliberately aimed at the unemployed, supposedly to create stronger incentives to work. The cuts include:

-       abolishing state contributions towards pension rights for the unemployed

-       abolishing heating subsidies for the unemployed

-       reductions in parental benefits, with the greatest reductions for the unemployed

-       flat-rate increases in health insurance

4.   Healthcare

The health budget deficit of €11 billion is being cut as part of the package. The German government proposed to impose a flatrate increase in health insurance contributions of €30 per capita, but was forced to change this to an increase of  0.3% of salary by both employers and employees. In addition,the cost of drugs is being reduced by freezing prices at 2009 levels and requiring drug companies to give discounts of 16% to insurerance funds, instead of 6%.

5.   Pensions

Pension reforms, including a gradual increase in the retirement age from 65 to 67 years by 2029, had already been adopted pre-crisis. The value and coverage of state pensions has also fallen as a result of these reforms.

Sources:

·         Spiegel Online 30/12/2009 Germany's Massive Job-Saving Program Could Still Fail

·         FES 2011 Arne Heise and Hanna Lierse March 2011 Budget Consolidation and the European Social Model - The Effects of European Austerity Programmes on Social Security Systems. FES http://library.fes.de/pdf-files/id/ipa/07891.pdf  .

·         IMF 2010:  A Status Update on Fiscal Exit Strategies 2010 http://www.imf.org/external/pubs/ft/wp/2010/wp10272.pdf

·         FT June 7 2010 Merkel spells out €80bn spending cuts; FT August 16 2010 Merkel to stick with cuts despite growth; FT October 13, 2011 German economists halve GDP growth forecasts

·         IMK Report no. 65 Oktober 2011 German economy in downward spiral

·         The Lancet 4 September 2010, German health reform compromise under attack