Performance, Innovation, Growth
Annual Economic Report for 2004

Performance, Innovation, Growth
Annual Economic Report for 2004

In the Annual Economic Report for 2003 the
Federal Government announced that it was making
2003 “The Year of Decisive Signals in Economic
and Fiscal Policy”. We have kept our word. The
announcement is being realised in Agenda 2010. It
is the most comprehensive economic policy reform
concept that has ever been launched in Germany
and it will help to
• lower subsidiary wage costs
• stimulate investment and consumption
• improve the incentive mechanisms on both the supply
and the demand side of the labour market and
• encourage independence and individual initiative.
This will permanently increase the growth potential
of the German economy and so enable more permanent
employment.
With Agenda 2010 we are doing what is necessary
to keep Germany attractive as a location for investment
and at the same time reduce the depressingly
high level of unemployment.
• With our reforms on the labour market we are
consistently implementing the maxim “Challenge
and Support”. Individual initiative will be better
rewarded than hitherto, and passivity will incur
sanctions. In combining unemployment and social
assistance we are removing inefficient dual structures
and opening up new opportunities for
employment – especially for the low skilled.
• By reducing taxes on 1 January 2004 we are
easing the burden on companies and private
households and creating new scope for investment
and consumption. In conjunction with the recovery
of dynamic in the world economy that will
accelerate the cyclical upswing here.
• By reforming the legislation on crafts we are
strengthening competition in that important sector.
It will be easier to start a new business in the
crafts and more training places and jobs will be
created.
• The reforms in the pensions and health systems
will reduce subsidiary wage costs and so make
work more rewarding again, for companies and
their employees. The health system reforms will
also increase efficiency in the health system and
ensure high quality health care. The pensions
reform will create the basis for medium and long
term financial stability in provision for old age.
With the measures in Agenda 2010 we are on the
right path. Securing international competitiveness
is an important task for policy and companies. The
good position Germany already has in inventions,
research and technology needs to be improved
further to secure stable jobs in Germany. Providing
incentives for this is the objective of the Initiative
“Partners for Innovation” which we have established
in cooperation with business, research and the trade
unions.
Wolfgang Clement
Federal Minister of Economics and Labour
Foreword

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Contents
Page
Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
I. Agenda 2010 – For More Growth and Employment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
II. Major Structural Policies and Reforms in Detail . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
A. Fiscal and Tax Policy for Stability and Growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .23
B. Modernising the Labour Market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .31
C. Ensuring Social Security for the future . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .39
D. Strengthening the SME Sector and Competition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .43
E. Education, Research and the New Technologies – Germany’s Future . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .49
F. Advancing Reconstruction of Eastern Germany . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .52
G. Expanding the Infrastructure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .54
H. Germany’s Future Energy Needs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .56
I. Advancing Ecological Modernisation and Consumer Protection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .59
J. Helping to Shape EU and International Economic Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .60
III. The Federal Government’s Economic Projection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
Diagrams:
Page
Diagram 1: Social Insurance Contribution Rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12
Diagram 2: Tax Reductions in 2005 compared with 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13
Diagram 3: The Degree of Openness of the German Economy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14
Diagram 4: Exports by Germany and Major Exporting Countries 1997-2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16
Diagram 5: Enlargement of the EU . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17
Diagram 6: Germany’s Export Shares by World Regions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18
Diagram 7: Productivity in Germany 1992-2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18
Diagram 8: R&D Intensity in Selected Countries 1993-2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20
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Diagram 9: The Structure of Federal Expenditures in 1972, 1992 and 2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Diagram 10: The Development in Net Federal Borrowing 2001-2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Diagram 11: The Development in Federal Government Debt 1982-2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Diagram 12: The Development in Federal Financial Aids in the Fiscal Planning Period 2001-2007 . . . . . . . . . . . . 26
Diagram 13: The Development in Child Allowances for the First and Second Child . . . . . . . . . . . . . . . . . . . . . . . . 27
Diagram 14: Basic Free Allowances and the Lowest and Top Rates of
Income Tax by International Comparison . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Diagram 15: The Development in Unemployment Figures and Rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Diagram 16: Promoting Self-Employment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Diagram 17: The Development in Mini-Jobs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Diagram 18: The Development in Age Quotients up to 2050 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Diagram 19: Numbers Employed in the Crafts 1996-2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
Diagram 20: World Market Patents by International Comparison . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
Diagram 21: Federal Government Expenditure on Research and Development . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
Diagram 22: Newly Enrolled Students in Germany . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
Diagram 23: Energy Mix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
Diagram 24: Energy Productivity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
Diagram 25: The Growth in World Output and World Trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
Diagram 26: Growth Rates in GDP in Germany and Major EU States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
Diagram 27: Annual Economic Projection for 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68
Tables:
Page
Table 1: Some Benchmark Figures on the Macroeconomic Trend in Germany . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7
Table 2: Benchmark Figures on the Macroeconomic Trend in Germany . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .69
Table 3: Comparison of the Annual Projection for 2003 with the Actual Development in 2003 . . . . . . . . . . . . . . . .75
– 3 –
Boxes:
Page
Box 1: The Main Reforms in Agenda 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Box 2: Key Components of the “Partners for Innovation” Initiative of the Federal Government,
Business, Research and the Trade Unions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Box 3: “World Champion in Exports” . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Box 4: Success in Reducing Subsidies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Box 5: The Federal Government’s Principles for the Future Shape of Subsidisation Policy . . . . . . . . . . . . . . . . . 26
Box 6: Tax Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Box 7: The First and Second Acts for Modern Services on the Labour Market (“Hartz I and II”) . . . . . . . . . . . . 32
Box 8: The Third Act for Modern Services on the Labour Market (“Hartz III”) . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Box 9: The Fourth Act for Modern Services on the Labour Market (“Hartz IV”) . . . . . . . . . . . . . . . . . . . . . . . . . 36
Box 10: The Act to Reform the Labour Market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Box 11: Reform of the Health System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
Box 12: The Amendment to the Ordinance on Crafts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
Box 13: Selected Measures to Reduce Bureaucracy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
Box 14: The Financial Markets Promotion Plan 2006 - A Ten-Point Programme to Strengthen
Corporate Integrity and Protect Investors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
Box 15: The Campaign for More Youth Training and Employment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
Box 16: Measures in the Telecommunications Sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
Box 17: “The Information Society 2006” Master Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
Box 18: Federal Government Housing Construction Measures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
Box 19: The Federal Government’s Foreign Trade Campaign in 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
Box 20: Recommendations Applying to Germany in the Principles of Economic Policy for
Member States and the European Community for 2003-2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
Box 21: Internationally Comparable Data on Unemployment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
Box 22: Review of the Annual Projection and the Actual Development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76
– 4 –
List of Abbreviations:
BA Federal Institute of Employment/Federal Employment Agency
bfai Federal Foreign Trade Agency
GDP Gross domestic product
BSE Bovine spongiform encephalopathy (mad cow disease)
BVWP Federal Transport Routes Plan
CO2 Carbon dioxide
COORETEC CO2 Reduction technologies
DB AG German Railways (Deutsche Bahn AG)
DGB German Trade Union Federation
DtA Deutsche Ausgleichsbank
EC European Community
ECB European Central Bank
EIB European Investment Bank
EIF European Investment Fund
EMU Economic and Monetary Union
ERP European Recovery Programme
EU European Union
FSF Financial Stability Forum
G 8 Seven Largest Industrial Countries plus Russia
GA Joint Task “For the Improvement of the Regional Economic Structure”
GfK Consumer Research Society
ha Hectares
HIPC Highly Indebted Poor Countries
ILO International Labour Organisation
IGBCE Mining, Chemical, and Energy Workers Union
IIC Industrial Investment Council
INNO-WATT Programme to Promote Research and Development in Growing Companies in
Neighbouring Regions
IT Information technology
ICT Information and communications technologies
IMF International Monetary Fund
JG Annual Report for 2003/2004 by the Council of Experts for the Assessment of the
Macroeconomic Development
JWB Annual Economic Report of the Federal Government
KfW Kreditanstalt für Wiederaufbau
– 5 –
SMEs Small and mid-size enterprises
OECD Organisation for Economic Cooperation and Development
OPEC Organisation of Petroleum Exporting Countries
PPP Public Private Partnership
PSA Personnel Service Agency
SARS Severe Acute Respiratory Syndrome
UN United Nations
UNCTAD United Nations Conference on Trade and Development
VDE German Unity Transport Projects
WTO World Trade Organisation
– 6 –
The Federal Government’s Annual Economic Report for 2004
The Federal Government herewith presents to the German Parliament and the Upper House (Bundesrat) the Annual
Economic Report for 2004, in accordance with § 2 of the Act to Promote the Stability and Growth of the Economy.
As envisaged in § 2, Para. 1 of the Stability and Growth Act, the Report contains
• an account of the economic and fiscal policies pursued by the Federal Government (Parts I and II),
• comments by the Federal Government on the Annual Report for 2003/2004 by the Council of Experts for the
Assessment of the Macroeconomic Development, which are integrated in Parts I and II, and
• a projection of the macroeconomic development in Germany (Part III).
The Federal Government thanks the Council of Experts for its comprehensive and committed work.
With the Annual Economic Report the Federal Government provides orientation data for 2004, in accordance with §
3 of the Stability and Growth Act.
In the preparation of the Annual Economic Report the growth and employment policy strategies of the Federal
Government were discussed with the Governments of the federal states and the municipalities in the Economic
Council for the Public Sector. They were also discussed with representatives of the trade unions and the Joint
Committee of the German Manufacturing Industry.
– 7 –
The prospects for cyclical recovery are much better in 2004 than in earlier years. After three slack years the world
economy is expected by the international organisations to gather notable momentum this year. The restraint on the
part of investors and consumers following the Iraq War has largely gone and the international financial markets and
indicators of confidence have clearly recovered since last spring. The powerful monetary and fiscal stimulus given
in the United States are having positive effects on the world economy. A revival is also becoming apparent in the
European Union. The German economy will profit particularly from the acceleration in the world economy, and
this will improve Germany’s economic position vis-à-vis the other states in the European Union.
For 2004 the Federal Government is expecting the cyclical recovery that started in the second half of 2003 to continue
and strengthen. Particularly the reform measures in the Agenda 2010 that have already been implemented,
and the income tax reductions, are a good basis for sustained upswing. The reform process that has been started,
together with a more dynamic development in the world economy, will help to renew and rebuild the confidence
of consumers and investors in the economic development in Germany. On average for the year 2004 gross domestic
product (GDP) should grow by between 1.5% and 2% in real terms. In the course of this development – and
as a result of strong growth in exports – investment in material and equipment should also gradually improve.
Private consumption will also grow again. This view is shared by most of the national and international forecasters.
The trend on the labour market will improve as the year goes on – initially owing to the labour market reforms and
later also as the economy revives. The number out of work in 2004 will be up to 100,000 below the average for
2003. The decline in employment will gradually cease and the number in employment should grow in the further
course of the year, if at a modest rate. On average for the year, however, employment is again expected to be below
the previous year’s level, owing to the unfavourable starting position at the turn of the year.
Annual Economic Report for 2004: Performance, Innovation, Growth
Summary
GDP in 1995 prices 0,2 –0,1 1,7
Persons in employment –0,6 –1,0 –0,1
Unemployment rate in %
(Definition by the BA) 9,9 10,5 10,3
Private consumption –1,0 –0,2 1,2
Investment in equipment –9,1 –4,0 3,0
Construction investment –5,8 –3,4 0,0
Domestic demand –1,6 0,1 1,2
Exports 3,4 1,1 5,8
Imports –1,7 2,0 5,0
Foreign trade and payments (contribution to GDP growth rates in %-points) 1,7 –0,1 0,5
Gross wages and salaries per person employed 1,5 1,1 1,5
* Data from the first preliminary calculations by the Federal Statistical Office
Year-on-year change in %
Annual projection
2004
2003* 2002
Some Benchmark Figures on the Macroeconomic Trend in Germany
Table 1
– 8 –
The labour market figures underline that the main task for economic policy is still to combat the depressingly high
level of unemployment. Hence, to create more growth and employment, reduce unemployment and regain full
employment by the end of this decade are the key aims of the Federal Government’s economic policy. Growth is
the prerequisite for more employment. Moreover, more employment generates more incomes and these in turn stimulate
growth. The reforms of the Agenda 2010, which are presented in context and in full in this Report, are the
first major step in this direction. They will create greater flexibility and dynamic on the product and labour markets,
accelerate reintegration in regular employment, remove bureaucratic obstacles, reduce subsidiary wage costs
and through reductions in taxation and charges enable people to enjoy higher net incomes. All this will help to support
economic dynamic this year and at the same time set the signals for sustained growth. Agenda 2010 will also
establish a new balance between individual responsibility, creativity and the readiness to take risks on the one hand
and solidarity and social justice on the other – between the generations as well.
These are not the only aims of Agenda 2010. To improve the conditions for growth, modernise old structures and
secure Germany’s international competitiveness is a permanent task for economic policy, especially in view of the
financial burden of the future demographic development and the growing internationalisation of our economy. The
Federal Government will therefore continue its reform course even after implementing the measures decided last
year. The more structural reforms contribute to creating new, competitive jobs and so more growth, the more easily
can the financial problems of the social insurance systems be tackled and solved. Not only that. Budget policy
can also be relieved of strain on a lasting basis – taking into consideration our obligations under the European
Stability and Growth Pact as well. That in turn will create the scope to invest more in the future: in education and
innovations, in research and knowledge, in the public infrastructure and for the benefit of families. Only so will
Germany be able to maintain its economic position in international competition. Only with the ambition to reach
top positions on the worldwide scale will Germany’s economic future be secured.
The Federal Government will therefore make 2004 “the year of innovation”. International studies have shown that
there is a stable relation between research, development, innovation and the trend in productivity. Investment in
education and research makes a major contribution to increasing productivity. Knowledge and human competence,
with the innovative strength of companies, are Germany’s most important resources.The Federal Government
is directing its policies to these issues. It is creating framework conditions that suit innovation and promoting research
and development. The Federal Government’s expenditure on knowledge, education, research and technology
has risen by around 21% since 1998. The public authorities and business enterprises together in Germany spend
around 2.5% of GDP on research and development; that is more than in many other countries. Together with the
other member states of the EU the Federal Government is pursuing the aim of increasing that share to 3% by 2010.
Successful innovation policy starts with school teaching. The Federal Government has therefore launched the biggest
school programme Germany has ever seen. With its investment programme „Education and Care for the
Future“ the Federal Government is providing a total of 4 billion A between 2003 and 2007 to support the federal
states in building up and expanding full-day schools. With this and the improvement in the financial position of
the municipalities to enable them to provide more child care the supply for families with children will be clearly
improved.
Innovation is the basis of future prosperity and jobs. The development of innovative products and services and
opening up markets for the future require close cooperation between all the groups responsible.The Federal
Government has therefore launched the initiative “Partners for Innovation” in conjunction with business, research
and the trade unions. The aim is to strengthen the “Innovation System Germany” on every level, remove obstacles
and create new confidence in Germany’s efficiency. Among the tasks of the Initiative are to identify markets for
the future and reach understanding on a joint approach to opening them up. Other tasks include establishing a new
culture of innovation and counteracting the threat of a shortage of new entrants to the natural sciences and engineering.
The Partners for Innovation will meet at regular intervals and set up an Innovation Office for Germany
to support their work.
Individual responsibility and initiative are essential to enable the business opportunities offered by innovations and
investment to be seized and risks taken. They are the crucial driving forces of economic dynamic. An economic
policy for more growth and employment therefore also means maintaining open markets, ensuring competition and
removing unnecessary obstacles and burdens. The work of freeing product markets of bureaucracy and making
them more flexible will therefore also be continued. I.a. the following measures are planned:
– 9 –
• An amendment to the Act against Restraints of Competition, with which the Federal Government will adjust
German competition law to the European legal framework. This amendment will also reform the law on press
mergers, in order to ensure variety, which is an important component of press freedom, under the changed
economic conditions.
• The amendment to the Telecommunications Law will continue the Federal Government’s competition-oriented
telecommunications policy. It firmly anchors efficient competition as the aim of sectoral regulation.
• With the further development of the regulatory framework in energy legislation the new EU single market directives
on electricity and gas will be implemented in national law. The Federal Government will transfer the tasks
which this entails to the Regulatory Authority for Telecommunications and Postal Services.
A macroeconomic environment that encourages innovation, investment and structural adjustment makes structural
reforms more effective. In such an environment they can be translated more quickly and on a broader basis into
economic dynamic. The key to more growth and employment therefore lies in structural reforms and macroeconomic
conditions that provide strong incentives and stimulus to innovation and investment without jeopardising
price stability.
Sustainability is a central and fundamental principle of the Federal Government’s policy. The National
Sustainability Strategy passed by the Federal Cabinet in April 2002 marks out the perspectives and sets the signals
for concrete political and social action right through to sustained development. In the autumn of this year the
Federal Government will present a progress report, which will clearly show how far the implementation of the
sustainability strategy has advanced, and where there is need for further action.
1. [Agenda 2010] To create more growth and employment,
reduce unemployment and regain full employment by the
end of this decade – these are still the key aims of the
Federal Government’s economic policy. With Agenda 2010
it has taken major steps closer to these goals. The Federal
Chancellor outlined the concept and measures of the wideranging
reform programme in the German Parliament on
14 March 2003. The aim is comprehensive modernisation
of the economy and society. In conjunction with favourable
macroeconomic conditions the reforms of Agenda 2010
will help to reverse the declining trend in growth rates and
the rising trend in unemployment that have lasted for many
years now in Germany. The Council of Experts for the
Assessment of the Macroeconomic Development acknowledges
this in its Annual Report: “With Agenda 2010 the
Federal Government has started courageous reforms that
are far-reaching in some sectors. That deserves to be
acknowledged” (JG Item 390).
– 10 –
I. Agenda 2010 - For More Growth and Employment
Box 1: The Main Reforms in Agenda 2010
• Structural reforms on the labour market, i.a. through
– limiting the eligibility for unemployment benefit to twelve or 18 months (for under- or over-55s)
– merging unemployment assistance and social assistance for the employable
– widening the scope for recipients of transfer payments to earn extra money, but also creating better
means of imposing sanctions
– modifying the law to protect against unfair dismissal to make this more employment-friendly
– reorganising the Federal Institute of Employment to make it a modern service provider on the labour
market (Federal Employment Agency)
– increasing placement and integration activities.
• Fundamental reform of the health system, i.a. through
– more freedom of choice for persons voluntarily insured on the extent and financing of their cover
– ending obligatory reimbursement of non-ethical drugs costs
– permitting mail-order for drugs and ownership of more than one pharmacy
– ending or reducing the reimbursement of the cost of services not covered by insurance
– higher percentual patient contributions
– ending statutory health insurance cover for dentures (from 2005)
– sick pay to be funded entirely by the insured (from 2006).
• Securing pensions finance, i.a. through
– suspending pensions adjustment as per 1 July 2004
– lowering the lower target figure for the fluctuation reserve to be held by the pensions insurance
bodies, in the medium term converting the fluctuation reserve into a sustainability reserve by raising
the upper target figure
– pensioners to pay all the contribution to care insurance
– introduction of a “sustainability factor”, which will take into account the relation between pensioners
and contributors
– reducing the incentives to take early retirement.
• Improving the financial situation of companies, private households and municipalities, i.a. through
– bringing forward some sections of the third stage of tax reform
– offering a bridge to tax honesty
– the Federal Employment Agency to take over most of the payments for the new basic security benefit
for job-seekers on behalf of the Federal Government and at its expense
– reducing the trade tax levy and measures to steady tax revenues for the municipalities
– an investment loan programme run by Kreditanstalt für Wiederaufbau: 7 billion A for municipal investment,
8 billion A for private housing renovation
• Strengthening private enterprise and promoting new businesses, i.a. through
– new forms of moving into self-employment from unemployment
– freeing new businesses of bureaucratic burdens 

With the measures presented in Agenda 2010 the Federal
Government is making the labour markets more employment-
friendly and placement in jobs more efficient. It is
reducing the bureaucratic obstacles and easing the burden
of taxes and charges on individuals and companies. Not
least, it is making the social security systems viable for the
future. It is the aim of the Federal Government to reduce
the contribution rates to social insurance to 40% of the
gross earnings on which these contributions are payable in
the medium term. If the consolidation course and the structural
reforms are continued the public sector share of GDP
should also fall to 40% in the longer term. Agenda 2010
will establish a new balance between individual responsibility,
creativity and readiness to take risk on the one side,
and solidarity, ecologically responsible action and social
justice – between the generations as well – on the other.
– Labour market: More individual responsibility and flexibility,
challenge and support – these are the key words for
the reforms on the labour market. Taking a job will be
rewarded, passivity will incur sanctions. Mini-jobs, midijobs
and Me Incs, better scope for recipients of transfer
payments to earn extra money, and the reduction in the
base rate of income tax will all increase the possibilities
of finding work and create incentives to take a job, while
persons who refuse to take acceptable jobs will incur
sanctions, or their Unemployment Benefit I and the new
Unemployment Benefit II, that are financed from contributions,
will be reduced. The Federal Employment
Agency is being made a modern service provider, this
process is in full swing. The services for employees and
employers are being improved and this will make it easier
and faster to place those willing to work in jobs.
Limiting the length of time unemployment benefit can be
drawn to a maximum of 12 or 18 months (for under- and
over-55s) is intended to end the trend to early retirement.
Combining unemployment and social assistance into
Unemployment Benefit II will make offers of integration
into employment available to all and so improve the prospects
of moving into an unsubsidised job. At the same
time the criteria on what is acceptable employment will
be made more stringent (for more details see Items 15ff.)
– Pensions: The ageing of the German population is facing
all groups in society with great challenges. Whereas in
2001 there were 100 persons aged between 20 and 64 for
28 of pensionable age (65 and older), in 2030 there will
only be 47.1 This development will have serious consequences,
especially for the systems of social security, and
for both contributors and beneficiaries. It is certain that
the financial burden of this development cannot be
shouldered by one generation alone. Either contribution
rates – and with them subsidiary wage costs – would
have to rise to an intolerable level, when growth chances
would be jeopardised or missed, or the level of pensions
would have to fall to an unacceptable level. In both cases
the question of justice for both generations would be
settled in a way that is one-sided and socially unjust.
The measures adopted by the Federal Government take
this into account. They will keep the contribution rate to
pensions insurance stable at 19.5% (cf. Diagram 1). The
Federal Government will also incorporate a „sustainability
factor“ into the formula for pensions adjustment, that
will take adequate account of the changing arithmetical
relation between pensioners and contributors. This will
spread the burdens resulting from the demographic development
fairly between contributors and pensioners. In
addition, the present incentives to take early retirement
will be removed, in order to raise the age at which people
actually retire (for more details see Item 25).
– Health care: The ageing of the population is having farreaching
effects on the cost-benefits structure of the
health insurance system as well. It is therefore even more
important for the future to offer high quality and patientoriented
health care while ensuring that the financial
conditions are viable for those insured. The health system
reforms passed by a large majority in the German
Parliament and the Upper House are an important step in
that direction. The Act to Modernise the Statutory Health
Insurance System will firstly enable the contribution rate,
and with it subsidiary wage costs, to be reduced. This
– 11 –
– offering innovative financing through the SME Bank
– freeing new businesses of obligatory fees to the chambers of industry and commerce, and the craft
chambers in their first four years
– easier conditions for new businesses to offer limited employment contracts
• Reform of the crafts, i.a. through
– ending the necessity for the master’s certificate in 53 out of 94 crafts
– independence after six years occupational experience („the long-time journeyman“) without a
master’s certificate in crafts entailing dangerous work as well
– in the other crafts the master’s certificate to be made a voluntary qualification
– easier and wider access to the master’s examination (years as journeyman no longer required).
1 Source: Medium variant of the 10th coordinated calculation of population development
by the Federal Statistical Office.
will ease the burden particularly on small and mid-size
firms, that are especially wage-intensive. Secondly, it
will improve the quality of health care and make it more
economical, while making patients more responsible for
their own well-being (for more details see Item 24).
– Taxes: The tax reductions on 1 January this year and next
will improve the bases for growth in the German economy.
The bottom and top rates of income tax will be
lowered in two stages to 15% and 42% respectively, their
lowest levels ever. The Federal Government set the signals
for these extensive tax cuts in the last legislative
period with its tax reform 2000 package. At the same
time tax concessions will be reduced. This will lower the
burden in the corporate sector on balance, and the net
incomes of persons in employment will rise. That will
promote the supply and the demand side of the economy,
and encourage investment and consumption equally. At
the same time, by bringing forward sections of the third
stage of the tax reform, the Federal Government will give
strong cyclical stimulus in this year (for more details see
Items 10f.)
– SMEs and reducing bureaucracy: Individual responsibility
and initiative are essential to enable entrepreneurs to
take the risks involved in innovation and investment.
They are the essential driving forces of economic dynamic.
An economic policy for more growth and employment
therefore also means maintaining open markets,
ensuring competition and removing unnecessary obstacles
and burdens. That applies particularly to new
businesses and small and mid-sized firms. The Federal
Government has therefore launched an “Initiative to
Reduce Bureaucracy” with the aim of strengthening
– 12 –
1,7
1970 1980 1990 1995 1998 1999 2000 2001 2002 2003* 2004**
17,0
45
40
35
30
25
20
15
10
5
0
18,0 18,7 20,3 19,7
8,2
1,3
3,0
4,3
6,5
1,0
1,7
1,7 1,7 1,7 1,7
6,5 6,5 6,5 6,5 6,5 6,5
11,4
12,5 13,2 13,5 13,5 13,5 13,6 14,0 14,3
42,0
19,3 19,1 19,1 19,5
Care insurance Statutory health insurance
Federal Institute of Employment Pensions insurance for blue and white collar workers
Source: Federal Ministry of Economics and Labour
* 2003: Expected result
** 2004: Prognosis
Social Insurance Contribution Rates
In % of gross earnings from employment liable for statutory contributions
Diagram 1
6,5
13,6
19,5
1,7
1,7
18,6
26,5
32,4
35,5
39,3
42,0 41,4 41,0 40,9
41,3 41,3
Germany’s competitiveness as a location for business and
removing unnecessary administrative and procedural
regulations. The amendment to the Ordinance on Crafts
has been incorporated in this initiative, and it will create
modern legislation on the crafts that is appropriate for
Europe. This reform will promote independence and
employment on a lasting basis in this sector, which is of
such importance for our economy (for more detail see
Items 29ff).
With Agenda 2010 the Federal Government is continuing
the modernisation of our country with determination. The
Agenda will increase the growth potential in the German
economy and so make a lasting contribution to increasing
employment. Its rapid implementation will help Germany
to find the way out of the cyclical low in the course of this
year. That is confirmed by all the national and international
experts:
• IMF: “The authorities’ revised policy strategy, with a
long-overdue focus on structural reforms, is well targeted.
Full implementation of all elements of the strategy is
essential for success and to strengthen Germany’s contribution
to global growth.”
• Council of Experts: “Moreover, the structural reforms
already started should have a positive effect on business
expectations. The backlog of reforms in Germany is beginning
to move. However, the reforms cannot be expected
to have rapid and powerful effect in the short term;
their influence on the domestic economic trend in 2004
will therefore rather consist of improving confidence in
the ability of policies to work than in concrete effects on
employment and production. But in conjunction with the
stimulus from abroad that should suffice to bring about a
moderate recovery in domestic demand” (JG Item 18).
The Federal Government will continue its reform course
after Agenda 2010 has been implemented as well.
Continuously to improve the general economic conditions,
and adapt the systems of social insurance to the challenges
of the future, remains an urgent task in view of the far-reaching
long-term consequences of the demographic development
and the increasing tempo of globalisation. Above
all, a high level of employment needs to be re-established
as quickly as possible. In order to the strengthen the forces
of growth the Federal Government will therefore continue
to remove inflexible elements on every kind of market and
monopoly structure (cf. Items 29ff and 63), promote innovation
(cf. Items 41ff.), and make the systems of social
insurance viable for the future (cf. Items 23ff.). The more
structural reforms help to create new and competitive jobs
and so also more growth, the more easily can the financial
problems of the social insurance systems be tackled and
dealt with. Not only that: Budget policy can also be relieved
of strain on a lasting basis. That in turn will create
the scope for more investment in the future – in education
and innovation, in knowledge and research, in the public
infrastructure and for the benefit of families. Only in this
way will Germany be able to maintain its position as a
location for business in international competition. Only with
the ambitious aim of reaching top positions on a worldwide
scale will Germany’s economic future be secure.
2. [The global framework] The worldwide dimension of
economic activity is eroding the significance of national
frontiers. After the great political changes towards the end
of the 20th century the integration of international capital
markets and the extremely rapid spread of the new information
and communications technologies have contributed
to this. The Internet and electronic data transmission are a
quantum leap in the integration of the world economy.
Geographical distances are less and less of a restriction to
– 13 –
Diagram 2
Tax Reductions in 2005 compared with 1998
In M In M In % In M In %
30.000 1.930 100,0 2.392 100,0
35.000 2.325 67,8 2.768 100,0
40.000 2.464 48,0 3.065 82,1
45.000 2.646 39,3 3.167 59,5
50.000 2.831 33,8 3.354 48,1
55.000 3.006 29,8 3.530 40,7
60.000 3.146 26,6 3.673 35,3
Source: Federal Ministry of Finance
Sole earner,
married, 1 child
Gross wage Sole earner,
married, 2 children
Tax reduction from 1998 (incl. child allowances)
Example: A sole earner, married with two children, earning 40,000 A gross will have his tax bill reduced by
82% from the 1998 level in 2005. That corresponds to 3,065 A (incl. child allowances)
the international trade in goods and services. That is also
making it easier for developing countries to enter into world
trade. The newly developed countries in Asia and Latin
America have already become important trading partners.
The developing countries still have to tread this path. It is in
their own interest, and in ours as well, for them to do so successfully.
For growing international trade and the progressive
integration of the world economy will bring increased
prosperity for the people in all the countries involved. That
applies particularly to Germany. The degree of openness of
our economy (exports and imports in relation to GDP) rose
from 20% in 1950 to 65% in 2000 (cf. Diagram 3).
Over the long term production structures will change
through the globalisation process. Globalisation will accelerate
structural change in favour of those goods that can
be produced particularly efficiently at home. For Germany
that means a progressive move away from labour-intensive
goods and increasing specialisation on capital- and knowledge-
intensive products. This will increase productivity
and ensure that the German economy remains competitive.
It is the only way to remain competitive on fiercely contested
markets.
But structural change is the reason for the widespread fear
of globalisation. Many workers who are forced off the
labour market through this process do not always, or not
immediately, find a new job in a different sector. In
Germany that is particularly the case for low-skilled workers,
but it now applies, if to a lesser extent, to more highly
qualified personnel as well. A growing number of companies,
for example, are outsourcing standardised work,
like bookkeeping and IT services, to foreign countries
where costs are lower. That directly involves job losses in
their sector. To compensate for such job losses new jobs
need to be created in other sectors. The international division
of labour has a contribution to make here, in that it
increases the competitiveness of companies and the efficiency
of our economy, and gives rise to new growth markets
worldwide. However, enormous efforts are also needed
to improve the economic framework conditions.
Hence the Federal Government is strengthening education,
research and innovation at home. It will make determined
efforts to ensure that the importance and essential function
of innovation – especially in the new technologies – are
more lastingly impressed upon the public consciousness
(cf. also Items 4 and 41).
That will require close cooperation between all the groups
responsible. At the invitation of the Federal Chancellor
members of the Federal Government and representatives of
business, research and the trade unions met on 15 January
this year for top level talks on a joint initiative “Partners for
Innovation” (cf. Box 2).
– 14 –
40
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
45
50
55
60
65
70
47,3
46,4
44,3
46,5
48,3
49,9
54,1
57,2
60,1
65,1
67,0
The Degree of Openness of the German Economy
Exports and imports in % of real GDP
Diagram 3
Source: Federal Statistical Office
67,6
68,7
– 15 –
Box 2: Key Components of the “Partners for Innovation” Initiative of the Federal
Government, Business, Research and the Trade Unions
1. It is the aim of “Partners for Innovation” to strengthen the “Innovation System Germany” on all levels,
remove obstacles and create new confidence in the efficiency of our country. The Initiative is oriented
to a comprehensive view of innovation policy, to which not only research and economic policy but also
many other policy areas will make a contribution.
2. The partners for innovation will meet at regular intervals. They will set up an Innovation Office in
Germany to support their work.
3. The innovation partners will make it their task to identify the markets of the future that are central for
Germany and agree on a joint approach to opening them up. The Federal Government will support
business in its efforts to become technological market leaders in these sectors, i.a. through setting
intelligent norms and with an innovation-oriented demand policy.
4. The trademark “Made in Germany” stands for top quality from Germany. It is the expression of our tradition
as a strongly innovative country. The Partners strongly object to considerations within the European
Commission to replace “Made in Germany” with a trademark to be used throughout the EU. They want to
fill the trademark “Made in Germany” with new dynamic and develop it so that it remains a sign of quality
recognised throughout the world under the conditions of the knowledge society as well.
5. Germany needs a new culture of innovation. The Innovation Partners want to use the Einstein Year
which the Federal Government is planning for 2005 to awaken understanding and enthusiasm for
knowledge and research and make the public more aware of the mutual responsibilities of research and
society. Among the events planned are a major Einstein exhibition in Berlin with an extensive accompanying
programme. Other activities, like an Einstein Prize, are being worked out jointly.
With projects for school children and young people the Innovation Partners want to awaken interest in
the natural sciences and technology at an early age and counter the threat of a shortage of recruits into
the natural sciences and engineering.
6. The quality of our education system will decide the future position of Germany in the world. Hence
our country needs to reform the entire education chain. The Partners for Innovation will play an active part
in this reform debate. A special task is to expand child care and the promotion of very young children.
The Federal Government will present draft legislation on this before the end of this year.
7. Against the background of the demographic development we can less and less afford to let creative
potentials lie idle. Hence the Innovation Partners want to cooperate to improve the conditions for combining
parenthood and a career. At the same time the concern is to make productive use of the knowledge
and experience of older workers.
8. The Federal Government will take an initiative in the European Council in the spring together with major
European partners to develop European industry policy into an industry and innovation policy that will
promote employment. It will represent the joint innovation policy concerns with determination in the EU.
Box 3: “World Champion in Exports”
Whereas the industrial countries have on the whole lost market shares in foreign trade in recent years,
owing to the growing integration of the newly developed countries into the world economy, German
companies have succeeded in improving their international competitiveness further. Germany has been
able to increase its share of real world exports of goods strongly since 1995 (cf. Diagram 4). That is i.a.
due to the lower rise in costs, especially compared with other Euro countries, our success in opening up
growth markets and the technological efficiency of the German economy (cf. also Item 69). According
to the IMF German exports of goods and services have risen faster in recent years, adjusted for price
changes, than world trade. In nominal account Germany actually outdid the United States, which has so
far been the leading export nation, in the first three quarters of 2003 and so advanced to be “world champion
in exports”. However, this is not least due to the fact that the exports valued in US dollars are shown
at a higher figure purely arithmetically, owing to the rise in the external value of the Euro. The price competitiveness
of German firms on world markets is about on its long-term average since 1975, according
to the Bundesbank index. Taking all these factors together, German suppliers should profit particularly
this year from the powerful expansion in world trade, which is being generally forecast (cf. Item 83).
– 16 –
1997 1998 1999 2000 2001 2002
95
100
105
110
115
120
125
130
135
140
145
Exports by Germany and Major Exporting Countries 1997–2002
By volume, index of exports of goods and services 1997 = 100
Diagram 4
Source: International Monetary Fund - World Economic Outlook
France Japan Italy Great Britain Germany USA
Moreover, the Federal Government is pursuing an industry
policy that is designed to increase the efficiency of industrial
companies, particularly in international competition
(cf. Item 73).
The Federal Government takes the public’s concern over
the globalisation process seriously. However, there is no
alternative to this process – at any rate, not one that would
on balance bring more benefit to all involved. As long as
there is competition in the world economy the internationalisation
of business cannot be stopped. To try to shut
ourselves off from it is not the answer. The consequences
would be less prosperity, less growth and even more problems
with employment – in Germany and worldwide.
That cannot be the aim of a responsible macroeconomic
policy. Instead, the Federal Government intends to shape
the conditions of globalisation by working for the further
liberalisation of world trade, by strengthening the multilateral
system of trade and promoting sustained development
(cf. Item 70). That will firm the success of German companies
on international markets (cf. Box 3) and so also
secure jobs at home.
3. [EU enlargement] The enlargement of the European
Union will further increase the division of labour. On
1 May 2004 ten countries in central and eastern Europe and
the Mediterranean area will join the European Union (cf.
Diagram 5). That is another important step towards finally
overcoming the division of Europe caused by the Second
World War. The successful model of European cooperation
is being extended to the accession countries. For Germany
in particular this development offers great business opportunities.
Nearly 12% of German foreign trade already consists
of exports to the countries of central and eastern
Europe (cf. Diagram 6). That share will grow further if the
border controls are dropped, if companies in the accession
countries are even more closely integrated in the European
market and if the prosperity of the 75 million inhabitants of
these countries increases. Germany will profit particularly
from this owing to the export strength of its industry and its
geographical proximity to the new member states.
However, competition for jobs can also become more fierce
after enlargement of the EU, and that will make it even
more necessary to strengthen the competitiveness of the
German economy through the measures of Agenda 2010.
4. [Performance, Innovation, Growth] It is not only the
European and international challenges that are increasing
the pressure to reform in Germany. There are also important
international developments. The increasingly ageing
population requires far-reaching adjustments, particularly
in the social security systems. The transformation process
for the new federal states is also far from complete. No
other country in Europe is facing this unique challenge.
Finally, structural inflexibilities and obstacles on the markets
for goods and factoring are still hampering economic
dynamic in Germany. These structural challenges must be
faced and overcome in a difficult cyclical situation. The
drastic fall in share prices and the threat from terrorism and
war have shaken the confidence of consumers and investors,
not only in Germany but worldwide. Economic growth
in Germany therefore remained far behind expectations in
the past year (cf. Box 22).
The weak growth in 2001 to 2003 is more than just a cyclical
phenomenon.2 The longer term growth trend in
Germany is particular cause for concern. The average
annual growth rates fell from 2.8% in the 1970s and 2.3%
in the 1980s3 to only 1.6% in the 1990s.4 To break that trend,
firstly all the employment potential must be fully activated
and exploited. Secondly, the growth in productivity in
Germany – which is beside the development in employment
the decisive factor for economic growth and prosperity
– must rise again. If it proves possible to reverse the
trend of declining growth in productivity the potential for
growth will also increase again.
– 17 –
FRA
ESP
POR
ITA
AUT
GER BEL
LUX
NL
DK
SWE
FIN
EST
LET
LIT
POL
TSR
SVK
HUN
SLO ROM
BUL
CYP
MAL
GRE
GB
IRL
Enlargement of the EU
Diagram 5
EU members
Countries joining on 1 May 2004
Candidate countries in the second round
2 Cf. JWB 2003, Item 19.
3 Western Germany; Source: Federal Statistical Office.
4 From 1992 whole Germany. Source: Federal Statistical Office.
– 18 –
1996 2002
22,9
57,1
8,2
7,7
2,7
1,4
20,0
54,7
10,9
10,3
1,9
2,2
EU countries Central and eastern Europe USA Japan China Rest of the world
Germany’s Export Shares by World Regions
1996 and 2002 in %
Diagram 6
Source: Federal Statistical Office
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
4,0
3,5
3,0
2,5
2,0
1,5
1,0
0,5
0
GDP per person employed GDP per hour
Source: Federal Statistical Office
Productivity in Germany 1992-2002
Year-on-year change in %
Diagram 7
– 19 –
To achieve this the Federal Government is working for
more performance and innovation:
• More performance: To ensure that performance will
again be better rewarded the Federal Government is
reducing the overall burden of taxation and charges (cf.
Items 10 and 23ff.). Through the tax reform employers
and employees will have to pass on very much less of
their earnings to the state from this year than before.
The stabilisation and further reduction of the social
insurance contribution rates will have the same effect.
That will encourage initiative, risk-taking and enterprise.
The scope for personal development will be greater.
achieving more will again be worthwhile. The Federal
Government is expecting this to give a clear starting
signal to the German economy.
In this way fiscal policy will be setting an important
example to encourage the social partners themselves to
work for more performance and productivity. Diagram
7 shows that in the past the trend in production per person
employed fell more strongly than production per
hour. That is because the average working time per person
employed has fallen. On average, annual working
time in Germany is clearly below the level of most
other industrial countries, people enter working life
later and often leave earlier. That does not mean that
German workers are less willing to work or less capable
of working. The Federal Government is relying on
the parties to the wage round negotiations to make working
times even more flexible and – where necessary –
extend them with the appropriate agreements.
The Federal Government is also offering incentives to
greater performance in the labour market reforms. For
the low-skilled and long-term unemployed in particular
merging unemployment and social assistance will not
only encourage personal commitment, it will also
reward it (cf. Item 17). With this step the Federal
Government is setting an unmistakable signal that performance
must again be made worthwhile, for workers
who are having difficulty integrating into the labour
market as well.
• More innovation: Investment in research and the introduction
of new technologies will make a major contribution
to higher growth in productivity. Germany’s
most important assets are its people, with their skills
and inventiveness, and the innovativeness of its companies,
whose most basic tasks include research and the
development of new, marketable products. The Federal
Government is creating framework conditions that will
encourage innovation. It is also promoting innovation
and investment, especially in the basic research area,
and supporting application-oriented research as well as
funding demonstration and pilot projects to market new
technologies. This is evident i.a. in the growing federal
expenditure on knowledge, education, research and
technology (cf. Item 41), which has risen by around
21% since 1998. Around 2.5% of GDP is spent by the
state and the private sector in Germany together on
research and development (cf. Diagram 8). That is
more than in many other countries. Together with the
other EU member states the Federal Government is
pursuing the aim of increasing that share to 3% by
2010.
The European Union started a growth initiative last
year with the aim of increasing productivity in the
European economies and improving their competitiveness.
At the insistence of the Federal Government the
initiative is to include strong support for research, development
and education in Europe (cf. Item 74). The
initiative aims to improve the framework conditions,
especially for private investment in forward-looking
technologies. It is essential to obtain strong commitment
from the private sector for the initiative. The main
source of finance must be private investors. At the same
time it is important to ensure that the EU and its member
states orient their budgets more to growth and future
investment.
Successful innovation policy starts in school. The
Federal Government has therefore launched the biggest
schools programme Germany has ever seen. With the
investment programme “Education and Child Care for
the Future” the Federal Government is contributing a
total of 4 billion A to the federal states between 2003
and 2007 to build up and expand full-day schools. With
these funds and with the reduction in expenditure by
the municipalities on child care provision the Federal
Government is improving the supply of child care for
families with children. A full day in school enables
more intensive individual attention to be given to children
and young people. Social differences in the level
of education and culture can be more easily smoothed
out and more equality of opportunity provided.
That should also help to ensure a higher level of achievement
in the long term, with more children and young
people encouraged to obtain higher school qualifications
and more school-leavers going on to university. It
is welcome that the numbers enrolling in mathematics,
the natural sciences and engineering have grown again
markedly recently. But whether that increase will be
sufficient to meet the foreseeable need for graduates in
these subjects cannot at present be forecast. To improve
the quality of university education the Federal
Government is working towards a “Pact for Universities”.
The aim is to make the universities more independent
and strengthen their profiling, while encouraging
further internationalisation.
• More growth: A macroeconomic environment that
favours innovation, investment and structural adjustment
will make the structural reforms more effective. For with
a macroeconomic framework oriented to growth and stability
structural reforms can be translated into economic
dynamic more rapidly and across a broader front. The
macroeconomic framework data must therefore be right.
Positive business expectations with favourable prospects
for sales and yields, and stable prospects for the mediumterm
price trend, with favourable financing conditions
and confidence that the structural economic and sociopolitical
challenges can be successfully tackled, will
induce companies to invest more and take on new staff.
In such an environment private households are also willing
to consume more. The key to more growth and
employment therefore lies in structural reforms, with
macroeconomic conditions that will provide strong
incentives and stimulus to innovation and investment
without jeopardising the price stability we have achieved.
Consequently, we need a “circulus virtuosus” of structural
policy flexibility and macroeconomic consistency
and stability, not a “circulus vitiosus” of structural
immobility with macroeconomic instablity.
– Fiscal policy: The Federal Government is holding to
its consolidation concept under the present difficult
economic conditions as well. The reduction of the
state share of GDP to 40% in the longer term remains
an important objective of fiscal policy. The Federal
Government is holding to the objectives of the
European Stability and Growth Pact. Admittedly, in
2003 it was impossible to avoid exceeding the 3%
reference level for the state deficit, but this was
mainly due to cyclical weakness. Allowing the “automatic
stabilisers” to work on the one hand, with successes
in structural consolidation on the other are
part of a medium and long-term consolidation and
growth strategy. Expenditures adjusted for special
cyclical effects fell by 7 billion A or on average 0.6%
a year between 1998 and 2002. Without the automatic
stabilisers the cyclical development in 2003 would
presumably have been even weaker than it actually
was. That would have made it much more difficult to
stimulate the cycle this year.
Through the interaction of structural reforms and
cyclical recovery the overall state deficit will decline
as from this year. From 2005 it will then be back
below the EC reference figure. A long-term fiscal
policy strategy of this nature is also recommended by
the Council of Experts (JG Item 393). They are decidedly
opposed to a fiscal policy “with cyclical
– 20 –
R&D Intensity in Selected Countries 1993-2002
Total R&D Expenditure in % of GDP
Diagram 8
Germany France Sweden USA Great Britain Italy Finland Japan
Source: Eurostat
0,0
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
0,5
1,0
1,5
2,0
2,5
3,0
3,5
4,0
4,5
– 21 –
reservations”, arguing firstly that this would have greatly
delayed effect and so bring a danger of procyclical
effects. Secondly, empirical evidence shows that the
growth effects of discretionary fiscal policy measures
are rather slight. The Federal Government agrees.
– Monetary policy: The introduction of the Euro was
a success. Many countries are profiting more from
falling interest rates. Others – like Germany – are
profiting as export nations especially from the end
of the exchange rate risk and from falling transaction
costs. The European Central Bank (ECB) is
pursuing a stability policy course, and is supporting
the economic recovery that is becoming evident in
the Eurozone with low interest rates. The Federal
Government agrees with the Council of Experts
(JG Item 719) that as the economic trend is still restrained,
monetary policy should work to support
the cycle. Should, as the Council of Experts argued
in November 2003, there be a further powerful rise
in the external value of the Euro there would then
be scope for relaxing interest rate policy (JG Item
719).
In Germany the inflation rate has been 1.4% for the
last two years (2001-2) and 1.1% in 2003. That was
clearly below the average for Europe as a whole of
2.2% (2002) and 2.1% (2003). So Germany is continuing
to fulfil its responsibility as stability anchor
for the Eurozone. The Federal Government expects
all the other member states to make their contribution
to price stability within the Eurozone and so
enable the ECB to continue its stability-oriented
course with monetary conditions that are as favourable
as possible.
– Wage policy: Wage policy is essential in combatting
unemployment. Moderate wage rises improve
the price competitiveness of German companies
and support the Federal Government in its policy
for more growth and employment. They also make
it easier for the ECB to keep to its stability target
with favourable monetary conditions. The Federal
Government therefore appeals to the negotiating
parties on wages in Germany and in Europe to fulfil
their responsibility in the common fight against
unemployment in the coming wage rounds. The
Council of Experts also insists that the social partners
should pursue an employment-friendly course,
particularly to enable the low-skilled to re-enter the
labour market (JG Item 634).
5. [Social Justice] The course the Federal Government has
taken with Agenda 2010 is an important prerequisite for
economic revival in Germany. It will become more attractive
again for individuals to take a job. The reforms do
make additional requirements of those involved. Some, for
example, will have to face more stringent criteria on
acceptability in job placement. More flexibility and personal
commitment are now required here. In future any legal
employment will on principle be regarded as acceptable
for the long-term unemployed (cf. Item 17). All this is
necessary to increase the incentives to greater commitment
and activity, and so increase the chances of employment.
In future commitment will be more rewarding than
passivity. Income from employment must give the recipient
a higher standard of living than income from state
transfers.
However, the state does not only make demands, it also
offers incentives. The employment agencies will concentrate
more on their key task. The tax burden will be reduced
as the basic free allowance is increased and the lowest
rate of income tax is reduced – especially benefiting the
low-paid. This strategy will make the social security network
a springboard back into working life for many. That
will create new earnings prospects for the unemployed. At
the same time it will ease the burden on the social insurance
systems and so open up scope for companies’ net
earnings to rise as subsidiary wage costs fall. In the end,
consequently, every party will gain.
The reforms of Agenda 2010 will create a new balance
between what the state should do and what the individual
has to do. That means constant critical appraisal of whether
what the state is regulating could not better be made
the responsibility of the individual. It necessarily follows
from this principle that the social dimension of the market
economy must be defined as appropriate to the present
time. First here must be the recognition that the concern at
present can no longer be to distribute increments. Many
benefits and claims that were affordable in earlier years
now have to be reduced or cancelled altogether, because
their effects have proved counter-productive in economic
policy. The social dimensions must be seen in a closer
connection with economic performance. Seen in this way,
reform policy is not counter to the principle of social justice.
It would be anti-social and economically senseless for
millions of people in Germany to remain shut out of working
life. Hence, with Agenda 2010 the Federal
Government is restoring better justice in employment in
Germany. It is also anti-social to heap considerable financial
burdens on future generations which the present
generation would probably not be willing to bear. The
Federal Government is therefore also creating greater
justice between the generations with its reforms.
Agenda 2010 will help to ensure that everyone can develop
their abilities fully in working life. The concern is to
give as many people as possible the best means of personal
development. The concern is equality of opportunity,
not equality of distribution. To give one example, what
matters is equal participation in education and training.
People have different abilities and gifts. Some are also
more committed than others. That must be reflected in
wages. Only in this way can performance and initiative -
the driving forces of economic activity – be encouraged.
Social policy plays an important part in all this. It must
ensure that no one is helplessly exposed to the great risks
in life and suffers want without cause. The Federal
Government will ensure that does not happen. But social
justice is not a one-way street. The modern social state
must also impose obligations on its citizens and ensure
that they fulfil their responsibilities to society. That applies
to the relation between the unemployed and those in
employment just as much as to the older and the younger
generations. Establishing that new balance is both the
message and the task of Agenda 2010.
– 22 –
– 23 –
A. Fiscal and Tax Policy for Stability and
Growth
6. [Sustained fiscal policy] The Federal Government is
keeping to its medium-term consolidation course.
Sustained reorganisation of public finances is central to
Germany’s economic future. Reducing new indebtedness
and consequently bringing down the debt level will give
the state new scope for action to support growth and
employment in Germany. At the same time it will help us
to master the challenges of demographic change and so
ensure a fairer distribution between the generations.
For reasons of growth and social policy improving the
quality of state expenditures is just as important as reducing
the quantity of public indebtedness. The structure of
the Federal budget has become increasingly determined
by consumption spending in recent years (cf. Diagram 9).
Expenditures on social insurance, especially pensions
insurance and the labour market, for example, in 2002
accounted for far more than 40% of total Federal expenditures.
Political decisions played a part here. For example,
the rise in the share of spending on pensions insurance
helped to keep subsidiary wage costs down.
Interest payments currently account for around 15%. In
order to improve the quality of the budget the Federal
Government has limited the growth in comsumption
spending and reduced subsidies (financial aids, tax concessions).
At the same time it has increased the share of
spending for the future in the Federal budget. Education,
research and innovations, knowledge, environmental
protection and combining family responsibilities with a
career are the main focus – with more expenditure on
investment. On the revenue side, finally, the determined
efforts to combat tax evasion and the sub-economy will
also stabilise tax revenues.
However, it is not only the level of debt that constitutes a
burden on the future. The Council of Experts adds to
state debt the future claims on benefits under the social
insurance systems (JG Items 439ff.). The “viability gap”
they calculate is several times the level of state indebtedness
in the base year 2002, and in the view of the Council
of Experts it shows the potential future burden on the
public budgets. The Federal Government holds the view
that calculating such viability gaps entails considerable
II. Major Structural Policies and Reforms in Detail
1972
1992
2002
12,4 0,2
15,5
2,5
69,4
Pensions Labour market Other social expenditures Interest payments Other Federal expenditures
The Structure of Federal Expenditures in 1972, 1992 and 2002
Shares in %
Diagram 9
Source: Federal Statistical Office
14,9
6,5
13,2
10,3
55,1
29,1
8,4
7,4
14,9
40,3
methodological problems, as much depends on the basic
assumptions on which the calculations are based.
Nevertheless, the size of the result does show the need
for action in the social insurance systems. According to
the Council of Experts’ calculations the burdens resulting
from the current systems of social insurance could
be roughly halved if in the long term the statutory retirement
age were raised from 65 to 67 and a sustainability
factor were added to the pensions adjustment formula
(cf. Item 25).
7. [Consolidation] In the 2004 Federal budget net borrowing
will be reduced markedly from 2003 to less than
30 billion A. At the same time the growth in consumption
spending will be limited and financial aids reduced. The
tax revenue will be stabilised by combating tax evasion
and the black economy, and by limiting special tax concessions
and rulings on exceptions.
In the view of the Council of Experts experience has
shown that consolidating by making cuts on the expenditures
side is more sustainable than consolidating by raising
revenues (JG Item 456). On the revenues side, in
turn, reducing tax concessions will have more positive
effects than raising taxes. In this the Council of Experts
is on principle supporting the consolidation course taken
by the Federal Government.
In regard to the effectiveness and credibility of the
European Stability and Growth Pact the Council of
Experts is in favour of a very restrictive application of
the rules (JG Items 413ff.). They confirm that countries
that have not yet balanced their public budgets face conflicting
aims in weak phases of the cycle between shortterm
stabilisation policy requirements and the deficit
rules in the Pact. To maintain the credibility of the Pact
on principle they recommend that countries that find
themselves in such a situation should accept the imposition
of sanctions as a final resort. In the view of the
Federal Government, however, it is necessary to utilise
the scope for judgement that is very deliberately allowed
in the Pact to ensure economically meaningful application
of the rules in each individual case. For with its
orientation to a balanced budget in the medium term and
the exact definition of allowable exceptions the Pact is
designed to permit appropriate reaction in the public
budgets to cyclical fluctuations as well.
8. [Reducing Subsidies] It is a central element of a
sustained fiscal policy to reduce financial aids and tax
– 24 –
2001 2002 2003* 2004* 2005* 2006* 2007*
45,0
40,0
35,0
30,0
25,0
20,0
15,0
10,0
5,0
0,0
The Development in Net Federal Borrowing 2001-2007
In billion M
Diagram 10
22,8
31,8
38,6
29,3
21,0
15,0
10,0
*2004: 3rd reading; 2005-2007: Federal Government Fiscal Plan for 2003/2007; 2003: preliminary
Source: Federal Ministry of Finance
– 25 –
concessions, which lead to misallocation of resources
and distort competition between companies. Moreover,
susbidies can also counter ecologically acceptable development.
They often misdirect private initiative and shift
individual responsibility on to the state. They make the
tax system complicated, unmanageable and so unjust.
They hamper structural change in the economy, and as a
result cause growth opportunities to be missed and jeopardise
jobs. Reducing subsidies has been and still is
necessary in economic policy. It is also appropriate in
900
800
700
600
500
400
300
200
100
0
The Development in Federal Government Debt 1982-2004
Including special funds, in billion M
Source: Federal Statistical Office; *from 2003 estimate; as per November 2003
Diagram 11
1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003*2004*
160
177 190
819
849
779
756
774 765
743 723
693
657
513
461
408
348
306
254
228
246
215 204
Box 4: Success in Reducing Subsidies
The Federal Government’s 19th Subsidisation Report shows the success in reducing subsidies in 2001 to
2004:
• Federal subsidies fell by 22.8 billion A to 22.3 billion A (–2.3%)
• Without the exception ruling in ecological tax reform the fall is actually from 18.5 billion A to 16.7 billion
A (–10.1%)
• Federal financial aids are falling continuously from 9.5 billion A to 7.0 billion A (–26.2%). The main element
in the reduction of financial aids is the reduction of grants for hard coal mining by 1.5 billion A.
• By contrast, a rise in Federal tax concessions from 13.3 billion A to 15.3 billion A (+14.8%) is evident.
This is almost entirely due to the exception ruling in the ecological tax reform and the home ownership
grant.
– 26 –
Box 5: The Federal Government’s Principles for the Future Shape of Subsidisation
Policy
• New subsidies are on principle only to be granted in the form of financial aids, for tax concessions have
a stronger tendency than financial aids to become permanent.
• It is being examined in how far tax concessions can be changed into financial aids.
• New and existing financial aids are in future only to be limited by law; on principle they will also be
degressive and subject to success control.
These principles will increase the pressure to justify new subsidies, create greater transparency and offer
better scope for steering.
9,5
8,1
7,0
6,8
6,1
5,4
0,5
1,5
1,3
1,1 1,0
1,0
1,0
0,5
0,5
0,5
0,5
0,5
1,8
1,5
1,4
1,1
0,8
5,7 4,8 3,9
7,7
1,2
0,5
1,4
4,6 3,8 3,5 3,1
2001 2002 2003 2004 2005 2006 2007
0,0
1,0
2,0
3,0
4,0
5,0
6,0
7,0
8,0
9,0
10,0
Others
Consumer Protection, Food and Agriculture
Housing
Trade and Industry (excl. Transport)
The Development in Federal Financial Aids
in the Fiscal Planning Period 2001–2007
in billion M
Diagram 12
Source: Federal Ministry of Finance
1,4
fiscal policy – for consolidation purposes. The Council
of Experts holds the same view (JG Item 42).
With the Mediation Committee results of 19 December
2003 further clear steps were taken towards the targeted
reduction of tax subsidies. With the Law to Accompany
the 2004 Budget and the implementation of the Protocol
Statement on the Act to Reduce Tax Concessions i.a. the
home ownership grant is being reduced by 30% in volume,
the long-distance travel allowance is being brought
down from 36/40 to a uniform 30 cents per km, and some
special regulations on turnover tax are being restricted.
These measures alone will lead to savings for the central,
state and municipal governments of more than 2 billion A
in 2004. For the period from 2004 to 2007 the savings for
all the public budgets will add up to around 20 billion A.
– 27 –
The Council of Experts objects to the argument frequently
put forward that reducing subsidies generally has
negative effects on employment (JG Item 457). A consideration
of the sectors directly affected is insufficient,
they argue, in view of the macroeconomic employment
effects. If, for example, the reduction is made at the same
time as the tax reform stage is brought forward, lowering
the rates of tax will have positive repercussions on other
economic sectors. The Federal Government takes exactly
the same view.
The Council of Experts on principle rejects subsidy
reductions using the “lawn mower method” (JG Items
462f.). Nevertheless, in the view of the Federal
Government, with a broadly based, socially acceptable
reduction in subsidies it is easier to overcome the resistance
of individual interest groups than with isolated
intervention in individual areas. Against that background,
in the Law to Accompany the 2004 Budget the
Federal Government has taken up the initiative on reducing
subsidies by Minister Presidents Koch and
Steinbrück, who have proposed a global reduction in
subsidies, which they see as the start of the critical task
of comprehensively reducing subsidies. In future, too,
the Federal Government will be directed by its fiscal,
economic, social and environmental policy objectives in
reducing subsidies.
9. [Children and the family] The financial benefits for
children and families have been continuously increased
since the change in government in 1998. The Federal
Government is continuing on that path by introducing an
allowance for single parents with children under 18 and
raising the threshold up to which children’s own earnings
are not taken into account in calculating family benefits.
From January 2005 the new child premium will free
families with children who could claim basic maintenance
grants under the basic job-seeker’s allowance regulations
solely as maintenance for their chiildren, of dependence
on these benefits. A central project for the Federal
Government in this legislative period is to ensure that
sufficient daily child care is available, especially for children
under three. The Federal Government will support
the municipalities in this task. In passing Hartz IV, which
reduces the financial burden on the municipalities, it
expects them to spend 1.5 billion A a year to expand child
care, especially for children under three, to meet
demand. The Federal Government is also expecting this
expansion to be carried out in stages and that by 2010 a
varied and expert range of day care centres and facilities
will be available. The Act on Child and Youth Assistance
will be amended accordingly.
10. [Tax policy] Bringing forward part of the 2005 tax
reduction stage to 2004 will reduce the tax burden on
Source: Federal Ministry of Finance
The Development in Child allowances for the First and Second Child
Monthly payments in M
Diagram 13
100
90
80
140
130
120
110
160
150
112
128
138
154
1998 1999 2000 2002
– 28 –
individuals and companies by altogether 15 billion A.
The basic free allowance for income tax has been raised
to 7,664 A. That is the highest level since the Federal
Republic of Germany was founded. The bottom and top
rates of income tax are being reduced, first to 16% and
45% respectively, and in 2005 to historical lows of 15%
and 42%. In 2004 the rate of corporation tax will be
lowered from 26.5% back to 25%. These measures will
also make the German tax system very much more competitive
internationally. Private consumption and investment
activity by companies will be increased.
Independent of this it remains a permanent task for the
Federal Government to keep Germany competitive as a
business location in tax policy as well.
The Council of Experts complains that despite having
the lowest tax ratio in the EU Germany is still a high tax
country (JG Items 520ff.). In the opinion of the Federal
Government this is to take too limited a view of the
effects of the tax burden on joint stock companies by
international comparison. Focussing on joint stock companies
may be understandable in regard to location
policy, as foreign companies often choose that legal form.
But, among other things. it is to overlook the fact that
partnerships, which predominate in the German corporate
scene, are subject to a much lower actual tax burden.
The Council of Experts themselves put forward evidence
for this (JG Item 527). The rise in the actual tax
burden calculated by the Council of Experts is due to a
rise in the rate of corporation tax that was limited to the
year 2003, and only introduced to help finance the flood
damage repairs. To argue from this that Germany is less
attractive for future location decisions is not in line with
companies’ own decision-making calculations.
The analysis by the Council of Experts of the distribution
of market incomes and income tax payable (JG Items
822ff.) describes the progressive effect of the German
income tax system, but it also reveals the need for action
in regard to widening the assessment base. The Federal
Government shares the view of the Council of Experts
that the German tax system is characterised by numerous
breaks (JG Items 533ff.). Especially in the taxation of
income from capital the synthetic income tax model is
far from being realised. The Federal Government sees
the analysis of tax policy by the Council of Experts as
offering indications for the future development of the
German tax system. The Federal Government is well
aware of the importance of international tax competition
and in how far our tax system deviates from the synthetic
income tax model. In regard to the economic neutrality
of taxation the change in the system to a dual income
tax proposed by the Council of Experts (JG Items 584ff.)
is worth considering. The Federal Government will carefully
appraise this, especially in regard to whether such a
change in the system would guarantee revenue on a
Box 6: Tax Policy
The following tax-relevant regulations formed part of the Mediation Committee results of
15/16.12.2003:
• The Law to Accompany the 2004 Budget covers i.a. reductions in income tax and regulations on the
reduction of tax concessions:
– bringing forward parts of the third stage of tax reform (raising the basic free allowance to 7,664 A,
reducing the bottom rate of income tax to 16% and the top rate to 45%);
– introducing a free allowance of 1,308 A for single parents;
– reducing the long-distance travel allowance to a uniform 30 cents per km;
– restructuring the home ownership grants, maximum basic amount in future 1,250 A (child premium
800 A);
– reducing other tax concessions and financial aids, i.a. the housing construction premium, reducing
the global amount for advertising costs to 920 A, reducing the saver’s free allowance and the worker’s
savings grant;
– reducing the income thresholds for education allowances in the first six months.
• Amending the Act on Trade Tax will bring the municipalities additional revenue in 2004 by reducing
the trade tax levy to 20%.
• Raising tobacco tax in three stages will go towards covering expenditure by the statutory health insurance
for services not covered by the insurance.
• The Act to Encourage Tax Honesty offers a “bridge into honest tax declarations” for a limited period
of time. This will offer persons practising tax evasion the opportunity to feed their capital back into the
economic cycle.
– 29 –
Denmark
Finland
Belgium
ItalyCanada (Ontario)
Austria
Ireland
USA
(New York)
France
Greece
Spain
Japan
Portugal
Great Britain
Luxemburg
Switzerland (Zurich)
Netherlands
Germany (2001 bis 2003)
Germany (2004)
Germany (2005)
Germany (1998/1999)
40
35
30
25
20
15
10
5
0
38,0
29,8
26,9
25,9
24,2
22,1
21,0
20,0 19,9
16,9
16,0
15,0 15,0 15,0 15,0
12,0
10,0
8,2
5,2
1,7
15,1
Denmark
France
Belgium
FinlandNetherlands
Germany (2001 bis 2003)
Austria
Germany
(2004)
Italy
Germany
(2005)
Ireland
USA
(New York)
Greece
Portugal
Great Britain
Luxemburg
Switzerland (Zurich)
Japan
Canada (Ontario)
Spain
Germany (1998/1999)
70
60
50
40
30
20
10
0
59,0
57,6 56,4 55,9
52,8 52,0 51,2 50,0 50,0
46,4
45,0 44,3
42,0 41,8
40,0 40,0 40,0
46,2
39,0 38,9
47,5
Basic Free Allowances and Lowest and Top Rates of Income Tax
by International Comparison
Diagram 14
Lowest rate of income tax in %
Top rates of income tax* in %
* Germany including the solidarity premium of 5.5% 

– 30 –
Denmark
Italy
Ireland
Portugal
USA(New York)
Japan
Spain
Austria
Canada (Ontario)
Germany (1998/1999)
Germany 2001 bis 2003
Germany 2004
Germany 2005
Switzerland (Zurich)
Greece
Luxemburg
Finland
France
Belgium
Great Britain
Netherlands
15.000
10.000
5.000
0
still Diagram 14
Basic free allowance in A
0 0 0 0 0
2.682
3.400
3.640
4.191
4.942
5.480
6.322
6.589
7.236
7.664 7.664
8.271
8.400
9.750
2.815
11.600
Source: Federal Finance Office (2003)
lasting basis to the state, and whether the criteria of
simplifying the tax system and achieving just distribution
would be met, as well as whether it would stimulate
investment and economic growth. The Federal
Government sees the exemption of dividends from taxation
as a serious problem in the dual income tax model
proposed by the Council of Experts. Under EU law it is
not permissible to differentiate for taxation purposes between
dividends received from abroad and those from
domestic sources. Exempting all dividends from taxation
would, however, open up to internationally operating
concerns the possibility of evading tax on corporate level
by bringing their dividends into Germany tax-free. For
that reason the Federal Government will certainly maintain
taxation on corporate and shareholder level.
Readjustment to reflect international tax competition is,
however, certainly possible.
It is the aim of the Federal Government – and has been
since it took office – to achieve a broader assessment
base by ending tax concessions as well as introducing
low rates of tax. It shares the view of the Council of
Experts (JG Item 613) that any reform of income and
corporation tax must be seen in connection with the
reforms of the system of social insurance. Against that
background, however, the Federal Government sees no
scope at present for the drastic reduction in the top rate
of income tax to 35% proposed by the Council of
Experts. But it will continue to accord high priority to
improving Germany’s tax competitiveness as a location
for inward investment.
11. [Municipal Finance] The municipalities will be placed
in a stronger position financially. In accordance with
the Mediation Committee results the trade tax levy will
be lowered from 28% to 20% with effect from 1 January
this year. The municipalities will receive around 2.5 billion
A more in 2004 and around 3 billion A more from
2005, with a slightly rising trend. Moreover, their revenues
from trade tax will be stabilised by widening the
assessment basis. The regulations in income and corporation
tax law on the taxation of minimum profits and
borrowing by partners, that were also decided in the
mediation procedure (“Basket II”), will also be applied
to trade tax. Appropriate free allowances and base
amounts will ensure that small and mid-size enterprises
(SMEs) remain largely exempt. Finally, the regulations
in corporation and trade tax law on company organs will
– 31 –
also be brought fully into line. But the subject of “reforming
municipal finance” will remain on the agenda – in
the context of further reforms to capital earnings taxation
(cf. Item 13).
12. [Taxation of Pensions] The Federal Government has
presented the draft of a law on pensions, the aim of
which is fundamental reorganisation of the treatment of
expenditure on provision for old age and pensions in
income tax law. It envisages a gradual transition to ex
post taxation of pensions paid by the statutory pensions
insurance, which will ensure taxation during working life
and afterwards that is evenly spread, constitutional and
fair to both generations. A corresponding regulation is
also the aim for company pension schemes. Moreover,
the tax regulations to encourage private pensions on
capital-cover basis (the “Riester pension”) will be simplified.
13. [The EU Directive on Interest Payments and the
“Bridge to Tax Honesty”] When the EU directive on
interest payments was passed in 2003 i.a. an exchange of
information between EU member states was agreed to
ensure that in future investors also pay tax on capital
earnings abroad. With the Act to Promote Tax Honesty,
which came into force on 1 January this year, the Federal
Government has offered taxpayers who have been evading
tax, a bridge. The law covers past years and allows
taxpayers to escape sanctions and fines for a limited
period if they pay tax that should have been paid in earlier
years in a global amount. The fiscal authorities are
also being given better means of investigation, which
should also help to achieve greater justice in taxation in
future. Building up on the interest payments directive
and the Act to Promote Tax Honesty the Federal
Government will put forward a proposal before the end
of this year for internationally competitive taxation of
income from capital that will be yield revenue; the rate
of tax and the transparency of the regulation are of equal
importance.
14. [Reform of the federalist system] The federalist
relations between the central government and the states
require reform, according to the Council of Experts (JG
Items 510ff.). The Federal Government agrees. The central
and state governments must be given greater scope
for political action and decision-making. The decisionmaking
processes within the individual states and the
performance of state tasks must be made more efficient,
more transparent and more suited to Europe, and political
responsibilities must be more clearly assigned.
Hence the Federal Government welcomes the appointment
by the German Parliament and the Upper House of
a joint commission on the modernisation of the federal
system. It is to work out concrete reform proposals before
the end of this year. It will be of crucial importance to
redefine the assignment of legislative competences between
the central and state governments, to accelerate
the legislative procedure by reducing the requirements
for approval by the Upper House, to correct undesirable
developments in mixed financing and to assess the possibilities
for separating the competences of the Federal
Government and the state governments in taxation.
However, as a whole in the view of the Federal
Government, cooperative federalism cannot be replaced
by competitive federalism. Rather, it must be reformed
by stronger orientation to the advantages of competitive
structures as emphasised by the Council of Experts, and
taking appropriate account of the field of tension between
competition and solidarity.
B. Modernising the Labour Market
15. [New Instruments for the Labour Market] With
the Job AQTIV Law the Federal Government made a
successful start with a new labour market policy in the
last legislative period, and it is continuing on that path
with the legislation for modern services on the labour
market. It is largely following the recommendations put
forward by the Commission for Modern Services on the
Labour Market (the Hartz Commission) in August 2002
for comprehensive reform of the labour market, the
labour administration and labour promotion. The Federal
Government has implemented the Hartz proposals or set
this in motion in several consecutive legislative procedures.
Two laws, the First and Second Act for Modern
Services on the Labour Market, essentially came into
force on 1 January 2003. Their main aim is to open up
new possibilities for employment, improve the quality
and speed of job placement, redirect further occupational
training and strengthen the services character of the
Federal Institute of Employment (BA).5
The reduction of seasonally adjusted unemployment that
started in the second half of 2003 suggests that the new
instruments are starting to work. The Federal
Government sees this as the first confirmation that it is
steering the right course for more employment and less
unemployment with the reforms it has started. Active
employment promotion has been consistently directed to
rapid integration in regular employment. In 2003 92,819
unemployed persons embarked on a new occupational
future through a Me Inc. with a grant from the BA. A
further 156,966 new businesses were set up using the
well-proven bridging loan (cf. Diagram 16).
5 For more detail see JWB 2003, II, B.
– 32 –
Box 7: The First and Second Acts for Modern Services on the Labour Market (“Hartz I
and II”)
Aims:
• To improve the job placement instruments
• To open up new fields of employment
Measures:
• Introduction of the Me Inc. or Family Inc. firms
• End the restrictions in the Act on Staff Leasing
• Set up and promote Personnel Service Agencies (PSAs) to strengthen the use of temporary employment
as a job placement instrument
• Obligatory registration at the labour office upon redundancy or if on a temporary contract, changes to
the rules on acceptibility and sanctions
• Redirection of further occupational training (training vouchers)
• Promoting the reintegration of older workers in the labour market
• New regulations on mini and midi-jobs
• Promotion of domestic services
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
5.000
4.500
4.000
3.500
3.000
2.500
2.000
1.500
1.000
500
0
12
11
10
9
8
7
6
Source: Federal Ministry of Economics and Labour
The Development in Unemployment Figures and Rates
National classification
Diagram 15
7,7
8,9
9,6
9,4
10,4
11,4
11,1
10,5
9,6
Unemployed in 1000s
Unemployment rate in %
9,4
9,8
Number unemployed (left scale) Unemployment rate (right scale)
10,5
The reform of mini and midi-jobs carried out by the
Federal Government as per 1 April 2003 has also increased
the number who are only employed on such jobs.
According to preliminary calculations by the BA this
number was c. 4.4 million in August 2003, about
300,000 higher than a year before (cf. Diagram 17). In
August 2003 there were also about 1.4 million with a
mini-job in addition to a job on which statutory social
insurance contributions were payable. The effect on the
number out of work cannot at present be exactly quantified.
Nevertheless, the development is positive on the
whole and it shows that mini-jobs are helping to create
jobs and at the same time lowering the employment
threshold.
Job placement was also greatly intensified last year. A
further 2000 jobs for placement officers were created at
the BA and this has given even greater emphasis to the
new placement maxim “Challenge and support”. Jobseekers’
own activities have clearly also increased as a
result. On a comparison with the previous year the number
moving from unemployment into the first labour
market increased by 10.5% to around 3.3 million.
Government-sponsored employment and the promotion
of further occupational training, on the other hand, have
decreased as more stringent efficiency criteria have been
laid down. In implementing the principle „Challenge and
support“ the new and more flexible regulation on blocked
periods has been applied more consistently.
The Personnel Service Agencies (PSAs) only began operating
slowly last year because with the periods that had
to be allowed for tenders it was hardly possible to set one
up before 1 Aprl 2003. By the end of the year the BA had
established PSA jobs for around 43,500 unemployed and
more than 30,000 temporary staff were working there.
Of the c. 12,400 who have left the PSAs again, 5,400
have started a job paying statutory social insurance contributions.
The Federal Government and the Initiative for Jobs! have
launched a national company competition called
– 33 –
January February March April May June July August September October November December
New business grant (Me Inc.) Bridging loan
Source: Federal Employment Agency (BA)
Promoting Self-Employment
(Number self-employed in 2003)
Diagram 16
58.344
62.687
66.024
69.501
74.488
79.376
74.784
76.931
79.030
76.856 72.502
61.847
51.163
42.266
33.209
24.537
15.855
7.290
1.630
76.864
75.369
83.068
89.807
0
20.000
40.000
60.000
80.000
120.000
140.000
160.000
180.000
100.000
“Creating Employment – Companies take Responsibility”.
The competition is part of the campaign “Team Work for
Germany”.
The competition is for companies that create or secure
jobs, or that show innovative commitment to employment.
A jury will decide on the best examples of employment-
oriented activity and the first awards will be given
in spring this year.
16. [Reorganising the Federal Employment Institute]
With the Third Act for Modern Services on the Labour
Market (“Hartz III”) the BA will become the modern services
provider on the labour market with up to date
management structures. In future the BA will operate as
the Federal Employment Agency; on local level its work
processes will be restructured and more strongly oriented
to its future key tasks.
In addition, the legislation on unemployment insurance
benefits and labour market policy instruments will be
simplified and the density of regulations thinned out.
These two measures together will enable the staff of the
BA to concentrate more in future on placing the unemployed
in work. This reduction in bureaucracy will greatly
simplify procedures for all the groups of customers
and create more transparency. It will also enable the BA
to use more of its personnel in activities that will encourage
people to take jobs and improve services for
employers.
17. [Combining unemployment assistance and social
assistance] With the Fourth Act for Modern Services on
the Labour Market (“Hartz IV”) unemployment assistance
and social assistance for the employable have been
combined to make a new benefit – basic security for jobseekers.
The legislation on this benefit will come into
force on 1 January 2005. The Council of Experts also
regards this as the right step in reform (JG Item 16). The
aim of the law is to improve the employment prospects
of the employable who are in need of assistance, particularly
through intensive consultation and monitoring of
– 34 –
The Development in Mini-Jobs
(Persons only employed for a few hours a week)
Diagram 17
June
September
December
March
June
September
December
March
June
September
December
March
June
September
December
March
April
August
1999 2000 2001 2002 2003
4,5
4,4
4,3
4,2
4,1
4,0
3,9
3,8
3,7
3,6
3,5
In millions
each individual and by improving the division of responsibilties
between the case managers and those in need.
The new regulation will end the coexistence of two state
benefits and the shifting of costs between the providers –
the municipalities and the Federal Government – this
entailed. On principle the job centres are intended to be
the only place to which all job-seekers in need of assistance
apply. The new benefit will in future be paid by
the BA and municipal authorities. The latter are in particular
responsible for accommodation and child care and
a range of psycho-social services. To improve cooperation
between the employment agencies and the municipal
providers it is intended to form working groups in the
job centres. In addition, the municipalities will from
1 January 2005 have the option of taking over the work
of the employment agencies – and with it all the work
connected with basic security for job-seekers. The details
are still to be settled in federal legislation. The Federal
Government will bear the costs insofar as the benefits
are provided by the Federal Agency. Should the municipalities
exercise their option appropriate financial arrangements
will come into force; the details are still to be
finalised in federal legislation.
The core element in the new benefit is case management.
This involves establishing the specific needs of the individual
and on this basis working out an individual offer
with the active cooperation of the person seeking assistance;
this will be steered through an integration agreement.
The new benefit provides adequate material security
within the socio-cultural existential minimum. In
future on principle any legal work will be regarded as
acceptable to recipients of the job-seeker’s basic security
benefits – that is, any work of which they are intellectually,
mentally and physically capable, and as long as
none of the exceptional circumstances specifically laid
down in the law (like bringing up a child under three or
caring for a relative) applies. The work or remuneration
must not infringe the law or be of immoral nature. The
possibilities for earning extra while employed will be
considerably improved and they will particularly benefit
– 35 –
Box 8: The Third Act for Modern Services on the Labour Market (“Hartz III”)
Aims:
• Extensive reorganisation of the Federal Employment Institute to make it a modern services provider
• Fixing a new control model for cooperation between the Federal Government and the BA
• Slimming down the legislation on benefits and simplifying the handling of important labour market
policy instruments.
Measures:
• A new personnel management and organisational structure for the BA
• Agreement on aims in the management of the BA
• A new distribution of tasks between management and self-administration
• Merging the integration grants
• Linking structural adjustment measures and job creation measures to make a uniform instrument of
promotion
• No new claims to unemployment benefits if participating in a job creation scheme
• Introduction of a transfer grant for workers on short time
• Simplifying the benefits legislation on unemployment insurance
• Future integration of the maintenance allowance with unemployment benefit for persons undergoing
further occupational training
• Uniform waiting period of twelve months before claiming unemployment benefit.
• New regulation on blocked period on infringement of insurance regulations
• From 2005 church tax will no longer be taken into account when calculating net earnings from employment
• Simpler regulations on the assessment of unemployment benefit
• Restructuring the personnel in the BA to achieve better care of the unemployed and better services for
employers
• Continuing to develop part-time work for older workers with binding security against insolvency
• Relieving the Federal Agency of the task of combatting illegal employment by transferring this task to
the customs and excise.
families. In contrast to the present practice of social assistance
100% transfer deduction rates will in future only
apply to gross monthly earnings above 1,500 A (up to
now c. 690 A). In addition, employable assistance-seekers
can be paid an employment grant for a limited period
of two years when taking a job, if this is necessary to
integrate them in the general labour market. Moreover,
employable persons seeking assistance will be paid a
premium to cover financial hardship when changing
from unemployment benefit to the basic security benefit
for job-seekers. The premium will be limited to two
years and be degressive.
Housing allowances will be reformed as per 1 January
2005, as the present coexistence of transfer payments
and housing allowances has caused considerable implementation
problems, with dual competences and elaborate
reimbursement procedures. Recipients of transfer
payments will therefore no longer receive housing allowances
from 1 January 2005. Their accommodation costs
will be covered by the transfer payment. The housing
allowances for persons who are not receiving transfer
payments will not change. This simplification will make a
considerable contribution to reducing bureaucracy.
The practical implementation of the new laws will take
time. Taking the need for confidentiality into account,
for instance, will mean that some regulations will only be
fully effective from 2006. The job centres can also only
become fully functionable in the course of time.
– 36 –
Box 9: The Fourth Act for Modern Services on the Labour Market (“Hartz IV”)
Aims:
• To merge unemployment assistance and social assistance for the employable to create a single state
system of assistance with benefits from a single source
• To strengthen active services to promote integration into employment by consistently incorporating
these in activities above local level
Measures:
• Introduce job centres throughout Germany
• Form working groups within the job centres to enable cooperation as close as possible between employment
agencies and the municipal providers
• Enable more intensive case-case monitoring by case managers
• Achieve flexible application of the integration instruments
• Strengthen initiative and individual responsibility
• Greater financial incentives to take a job and keep it
• Job acceptibility appropriate to the laws on social assistance
• More stringent financial sanctions for infringement of obligations, especially rejecting a job without
important reason
• A premium on unemployment benefit II limited to two years and degressive, to be paid directly after
unemployment benefit ceases
• Inclusion of the employable in need of assistance in health, care and pensions insurance
• Targeted and stronger promotion of young people under 25 by placing them in jobs, training or opportunities
for employment without delay
• Stronger sanctions on young people under 25 who turn down acceptable offers of jobs
• The providers of the new benefit will on principle be the BA and the municipalities
• However, state districts and cities without districts will have the option of performing all the tasks connected
with basic security for job-seekers as providers themselves, taking over from the employment
agencies
• The Federal Government will bear the costs of benefits provided by the BA Should the municipalities
decide to exercise their option appropriate finance is to be arranged; the details are still to be finalised
in federal legislation.
• Apart from the option model: the municipalities and their competences are to be more involved in the
integration of the long-term unemployed; agreements are to be made on employment policy measures
with the local authorities.
18. [Reform of Unemployment Insurance] An effective
labour market policy means concentrating organisational
and personnel resources on job placement and
integration in working life. That is why the Federal
Government is simplifying the legislation on unemployment
insurance and so relieving the employment
agencies from administration work as far as possible.
At the same time this will make a contribution to reducing
bureaucracy, which in turn will bring simplification
and more transparency for all groups of customers.
The following are the chief simplifications:
• The subsistence allowance for persons in further
occupational training will become part of unemployment
benefit
• The regulations on assessment for unemployment
benefit will be redrafted
• Special waiting periods hitherto required before unemployment
benefit can be claimed will be dropped.
To achieve a permanent improvement in the employment
prospects for older workers, avoid long-term
unemployment for this group in particular and stop the
trend to early retirement the Federal Government is
reducing the maximum period for which unemployment
benefit can be claimed (at present 32 months). In
future, workers under 55 will only be able to draw
unemployment benefit for a maximum of twelve
months and older workers for up to 18 months. To
maintain confidentiality in this insurance benefit the
new regulation will only take effect after a transition
period of 25 months. The reduction in expenditure on
unemployment benefit this will achieve will, not least,
open up scope to reduce subsidiary wage costs.
Against the more far-reaching proposal from the
Council of Experts to make unemployment benefit
degressive (JG Item 711) it must be said that it is not
empirically proven that lowering the level of benefits
further would create incentives to take a job. It must
also be borne in mind that for constitutional reasons the
level of benefits cannot be reduced ad infinitum. For as
soon as the gap between unemployment benefit financed
by insurance contributions and the benefits under
the social security system is no longer clearly apparent,
the question arises whether compulsory membership of
the insurance is still justified, or whether it constitutes
intervention in the general freedom of action (Art. 2,
Basic Law).
The proposal by the Council of Experts to scale an
employer’s social insurance contributions according to
the company’s redundancy record (JG Items 712ff.)
could, in the view of the Federal Government, have
undesirable procyclical effects and act as an obstacle to
new appointments. Contrary to the view of the Council
of Experts, it would probably also involve very considerable
administrative work.
19. [Protection against Unfair Dismissal] Changes to
the legislation to protect against unfair dismissal and to
the periods allowed for temporary employment contracts
are contained in the Act to Reform the Labour
Market which came into force on 1 January this year. It
forms part of Agenda 2010, which also aims to reduce
obstacles to new appointments in employment law in
order to improve the conditions for more employment
and growth. The amendments to the legislation take
balanced account of the interests of companies, workers
and job-seekers.
• The area of application of the Act to Prevent Unfair
Dismissal is changed. In companies employing ten
people or less the Act does not apply to workers newly
appointed from January this year. For workers already
employed in companies employing between six and
ten people the Act still applies. The Federal Government
assumes that the new regulation will encourage
employers to respond to a favourable order situation
more rapidly than before by taking on new personnel,
and so open up better employment chances for jobseekers.
• To provide greater legal clarity the social selection of
workers to be made redundant for commercial reasons
will be limited to four criteria – the duration of
employment with the firm, age, maintenance obligations
and whether, and how severely, the worker is
handicapped. Workers can be excepted from the social
selection if the firm has a justified interest in continuing
to employ them, on account of their knowledge,
skills and performance, or in order to maintain a
balanced personnel structure. The courts’ examination
of the social selection will be limited to gross error or
negligence, if the employer and the works council
have agreed on a settlement and the workers to be
made redundant are named in a list.
• In cases of redundancy for commercial reasons the
employers and the workers will have the possibility of
reaching a simple settlement outside the courts at
favourable cost. If the employer has to make staff redundant
for commercial reasons the worker can choose between
court proceedings under the Act to Prevent Unfair
Dismissal or accepting a settlement of half a month’s earnings
per year employed. He can only claim the settlement
if his employer has informed him in the redundancy
letter that he can claim the settlement allowed by law if
he lets three weeks elapse without instigating legal proceedings
against unfair dismissal.
– 37 –
• For persons setting up a new business it is now easier
to take on temporary staff. In the first four years of a
new company’s operation temporary employment
contracts for up to four years can be given without
objective reason. This takes into account that in the
difficult phase of building up a company commercial
success is particularly uncertain and the development
in staffing requirements difficult to estimate.
The Council of Experts acknowledges this reform as a
cautious first step to making protection against unfair
dismissal more flexible in order to achieve more
employment. At the same time it takes the social needs
of workers for protection and the interests of job-seekers
into account (JG Item 676). More far-reaching
proposals from the Council – e.g. the possibility for
workers to choose right from the start between statutory
protectio