Germany: Selected Issues

July2024 GERMANY SELECTEDISSUES IMFCountryReportNo.24/230 ThispaperonGermanywaspreparedbyastaffteamoftheInternationalMonetaryFundasbackgrounddocumentationfortheperiodicconsultationwiththemembercountry.ItisbasedontheinformationavailableatthetimeitwascompletedonJuly1,2024. Copiesofthisreportareavailabletothepublicfrom InternationalMonetaryFundPublicationServicesPOBox92780Washington,D.C.20090Telephone:(202)623-7430Fax:(202)623-7201 E-mail:publications@imf.orgWeb:http://www.imf.org InternationalMonetaryFundWashington,D.C. ©2024InternationalMonetaryFund July1,2024 GERMANY SELECTEDISSUES PreparedByMustafaSaiyidandGalenSher ApprovedBy EuropeanDepartment CONTENTS OPTIONSFORCREATINGFISCALROOMFORINVESTMENTANDOTHERSPENDINGNEEDS3 A.Introduction3 B.Germany’sGovernmentRevenueandExpenditureLevelsinInternationalComparison5 C.Option1:FindingEfficienciesinHealthcareSpending6 D.Option2:StabilizingSocialSecurityFinances8 E.Option3:EliminatingEnvironmentallyHarmfulSubsidies10 F.Option4:RaisingRevenuesfromGoodsandServicesTaxes13 G.Option5:RaisingPropertyTaxesandClosingLoopholesinInheritanceandGiftTaxes15 H.Option6:EarningHigherReturnsontheGovernment’sAssets16 I.Conclusion17 FIGURES 1.InvestmentNeedsAreHighandSpendingPressuresWillRise4 2.HighPublicHealthSpending6 3.GovernmentTransferstoSocialSecurity8 4.HighOldAgeandSurvivors’PensionsandHighIn-KindBenefits11 5.EnergySubsidiesin201813 6.LowGoodsandServicesTaxRevenues14 7.LowPropertyTaxRevenues15 8.LowRevenuesfromAssets17 GERMANY TABLES 1.RevenueandExpenditureComparedtoOtherAdvancedEconomies6 2.EnvironmentallyHarmfulSubsidies,201812References18 FINANCIALSTABILITYRISKSFROMCOMMERCIALREALESTATE20 A.Introduction20 B.RealEstateDevelopments20 C.ExposureofGermanFinancialInstitutionstoCRE23 D.SolvencyStressAnalysis24 E.PolicyRecommendations27 FIGURES 1.RealEstatePriceDevelopments21 2.CREExposuresandPerformancebyType22 3.PotentialCREStressImpact25References29 2INTERNATIONALMONETARYFUND OPTIONSFORCREATINGFISCALROOMFORINVESTMENTANDOTHERSPENDINGNEEDS1 Germanyneedssubstantiallyhigherlevelsofpublicinvestment.Atthesametime,thecountryisfacingrisingpension,healthcare,andlong-termcareexpendituresassociatedwithaging,aswellasrisingdefensespendingpressuresassociatedwithRussia’swarinUkraine.IfGermanywereeventuallytoeasemoderatelyitsnationalfiscalrules,asrecommendedbyIMFstaff,thiswouldcreatesomefiscalroomtoaccommodatetheserisingspendingpressuresthroughahigherdeficitbutwouldnotbesufficientonitsown.2ThischapterthereforeexploresoptionsforGermanytogenerateadditionalfiscalroombyreducingitspublicspendingandincreasingitsrevenues,whileminimizingtheassociatedcoststotheeconomy.Toaidthisexploration,thischapteralsoexaminesareaswhereGermany’sspendingandrevenuelevelsstandoutininternationalcomparison.Theoptionsforgeneratingfiscalroominclude:(i)findingefficienciesinhealthcarespending;(ii)stabilizingthefinancesofthesocialsecuritysystem;(iii)eliminatingenvironmentallyharmfulsubsidies;(iv)raisingrevenuesfromgoodsandservicestaxes;(v)raisingpropertytaxesandclosingloopholesininheritancetaxes;and(vi)earninghigherreturnsonthegovernment’sfinancialassets. A.Introduction 1.Overthemediumterm,Germanyfacesrisingspendingpressuresfromaginganddefense,aswellasaneedtoexpandpublicinvestmentintransport,energy,communications,andotherinfrastructure. Aging-relatedhealthandpensionsspending.TheEuropeanCommission’sAgingReport2024(EuropeanCommission2024)estimatesthatGermany’spublicpensionandhealthexpenditureswillincreaseby0.6and0.3percentofGDP,respectively,overthenextfiveyears(Figure1,left),andby0.9and0.7percentby2040.Bothcontributionsandfederaltransferstothepensionsystemincreasequasi-automatically3whencashreservesinthesystemareexpectedtofallbelowaminimumthreshold.Transfersfromthefederalgovernmenttothepensionsystemarethereforeprojectedtoincreaseby€32billionby2030accordingtothegovernment’sPensionsInsuranceReport2023(FederalMinistryofLaborandSocialAffairs2023),or0.3percentagepointsofGDPusingstaff’sGDPprojections. Defensespending.TomeetitsNATOtargets,Germany’sdefensespendingwillalsolikelyriseby 0.3percentofGDPinthenearterm.Whilethespecialfundfordefensewillfinancesomeofthis, 1PreparedbyGalenSher. 2“Fiscalroom”isusedinthischaptertorefertotheabilitytoincreasespendingorreducerevenuewithoutviolatingGermanorEUfiscalrules.Thisdiffersfromtheconceptof“fiscalspace,”whichtheIMFdefinesas“theabilitytoprovidefiscalstimuluswithoutjeopardizingthesustainabilityofthefinancialpositionorthestabilityoftheeconomy”(see,forexample,IMF2022). 3Theincreasesarequasi-automaticinthesensethattheyarespecifiedinSections158and213ofthe SozialgesetzbuchVI,butincreasesincontributionratesrequirearegulationtobeissued. INTERNATIONALMONETARYFUND3 two-thirdsofthefundareprojectedtobecommittedbytheendofthisyearandthefunditselfwillexpirein2027. Figure1.Germany:InvestmentNeedsAreHighandSpendingPressuresWillRise ExtraPublicSpendingandInvestment (PercentagepointsofGDP) 1.2 2023-30 1.0 GrossPublicInvestment (PercentofGDP) 6 2030-50 5 2018-2022average 2022 0.8 4 0.63 0.42 0.21 0.00 PensionsH