GERMANY

FISCAL POLICY AND LONG-TERM GROWTH

Background
A. SICK MAN
OF EUROPE
• GROWTH RATE
WAS BELOW EU
AVERAGE.
• RISING
UNEMPLOYMENT
WAS FROM 5.5
PERCENT IN 1992
TO 11.3 PERCENT
IN 2005.
B.FISCAL BALANCE
WORSENED

FISCAL DEFICIT HAS

WIDENED FROM 1 PERCENT
IN 2000 TO 4 PERCENT IN
2003.

2003 2005

THE DEBT RATIO ROSE FROM

AROUND 41 PERCENT OF
GDP IN 1991 TO 68 PERCENT
OF GDP IN 2005.
FISCAL POLICY
REFORMS
 • REFORM PROGRAM IN 2003.
AGENDA • THEIR MOTIVATION WAS TO REFORM AND
LIBERALIZE THE LABOR MARKET TO
2010 INCREASE BOTH LABOR SUPPLY AND LABOR
DEMAND.
 • EXPENDITURE BASED
CONSOLIDATION
• THE POTENTIAL INDIRECT EFFECTS
MAJOR ON PUBLIC SPENDING – THROUGH
FISCAL A REDUCTION IN UNEMPLOYMENT
AND STRONGER GROWTH- ALSO
REFORMS HELPED IN SOCIAL SPENDING.
  THESAVINGS ON THE
EXPENDITURE SIDE WERE LARGER
ENOUGH TO CREATE FISCAL SPACE
THAT ALLOWED TAX CUTS.

TAX
REFORMS
NEW FISCAL RULE • THE DEBT BRAKE REQUIRES THE STRUCTURAL DEFICIT OF
THE FEDERAL GOVERNMENT NOT TO EXCEED 0.35
:          DEBT BRAKE PERCENT OF THE GDP, AND THE STRUCTURAL DEFICIT OF
THE GERMAN STATES REAMINS AT ZERO.
 • THE FISCAL CONSOLIDATION TARGETS WERE
VERY DIFFICULT TO ACHIEVE.
• THE SEQUENCING AND PRIORITIZATION OF REFORM
NOTABLE EFFORTS HELPED TO SAFEGUARD POLITICAL SUPPORT.

DESIGN • POLITICAL SUPPORT WAS NOT FURTHER

UNDERMINED BY ADDITIONAL FISCAL
FEATURES CONSOLIDATION MEASURES.
• WHILE FROM AN ECONOMIC PERSPECTIVE,IT WOULD
HAVE BEEN DESIRABLE TO IMPLEMENT REFORMS
EARLIER, FROM A POLITICAL ECONOMY PERSPECTIVE,
THE TIMING OF THE REFORMS WAS PROBABLY NOT A
COINCIDENCE.
 GERMANY RECORDED STRONG GROWTH OF SIGNIFICANTLY
ABOVE 3 PERCENT IN 2006 AND 2007.

ECONOMIC IT ALSO SHOWED RELATIVELY STRONG GROWTH PERFORMANCE

WITH AVERAGE GROWTH RATE 2.2 PERCENT IN 2010-13
  WHERE ESTIMATED WAS ABOUT 1 TO 1.5 PERCENT. 

PERFORMA AN OVERALL DEFICIT OF 4.2 PERCENT IN 2003 TURNED INTO A

FISCAL SURPLUSOF ALMOST 0.2 PERCENT BY 2013.  
NCE AFTER
THE REFO AFTER ITS 10TH ANNIVERSARY , THE REFORM PROGRAM IS

RM THEREFORE WIDELY BELIEVED TO HAVE BEEN SUCCESSFUL.

CONTRIBUTION OF REFORMS TO ECONOMIC RESURGENCE OF

GERMANY NEVERTHLESS REMAINS CONTROVERSIAL.
Impact on Long-
Term Growth
 A. Long-term
Growth
Dissected
• Late 1990’s- Early 2000’s ->
sharp slowdown in growth; 
2005-2007 -> pickup in
growth
2008-2009 -> negative growth
• While Germany’s growth
lagged its peers by about 2
percentage points in the 10
years before the reform,
post-reform it has been
higher by about 0.5
percentage points.
• Fiscal reform in Germany has
resulted in growth
acceleration of about 0.7–1.5
percent.
 • Labor and TFP (Total Factor Productivity) were the
main drivers of the post-reform growth performance.
• Spending reform increased incentives for job search
and contributed to an increase in labor supply. It also
created fiscal space for a reduction of the tax burden,
which contributed to an increase in labor supply as
well.
• The continuous contribution of labor reflects
structural changes that moderated wages, increased
steady state employment, and improved matching in
the labor market.
• Capital contribution to growth has seen a gradually
B. Fiscal decreasing trend. There is no clear evidence that
fiscal and labor market reform affected investment
Reform: A • Income inequality saw a slight increase until 2007,
both before and after redistribution, and largely
Game stabilized afterwards.
• Summing up, there is evidence that fiscal and labor
Changer? market reforms may have contributed to an increase
in long-term growth by facilitating strong
employment growth.
LESSONS
• Reforms that aimed at promotion of long-run
growth were helpful in sustained growth and
fiscal consolidation.
• However, there are signs that the recent strong
economic performance and buoyant public
revenue made it harder for politicians to
safeguards the economic achievements of the
reforms.
• The reforms may have contributed to the slight
increase in income inequality.
 Appendix.
Robustness Tests
For Germany
A. Placebo Tests
Sequential
Exclusion of a
Comparator
Country
C. Changes
in the
Reform
Periods
D. Changes in the
Reform Periods.