DB research's caption: A look at federal spending shows the big need for political action to increase the fiscal scope for manoeuvre for the public sector: close to 65% of the federal budget 2005 is spent on social security and interest - i.e. on redistribution and debt repayment. Interest expenditure alone, at over 15%, has a higher volume than future-oriented spending, and the interest burden is set to rise further. Against this backdrop, the challenge for fiscal policy is clear: state expenditure on consumption and government debt have to be reduced considerably to increase the scope for spending on investment.Last week they detailed the German government spending ratio.
DB research's caption: A look at the government share in the economy shows three remarkable developments:
1. The high level of government expenditure is mainly due to the strong increase in the 1970's. In the early 1970s government expenditure in relation to GDP was 39.1%; at the end of the 1970's it was 47.2%, thus already almost at the same level as in 2004 (47.5%).
2. The downward trend of the 1980's was stopped and even reversed by German unification. The state spending ratio is now returning towards its lower pre-unification level, however.
3. The breakdown of the public spending ratio into the components central, regional and local governments and the social-security system shows that the share of the state and local governments has declined since the mid-1970's and is currently back to the level of the late 1960's. By contrast, the share of social-security expenditure has increased strongly for a long time, has stabilised at a high level since the mid-1990's and has been on a downward trend only in the last two years.
All in all, it becomes clear how difficult it is to undo past sins. The downward trend of spending by central, regional and local governments gives reason for optimism, however, and should serve as a guideline for social-security systems.
It won't be easy to cut social security spending further, with the unemployment rate stubbornly remaining close to 10 percent and a lot of cuts already enacted that will drive more voters to the parties standing left of the SPD in the coming election.
Germany's demographic development - declining part of the population participating in the labor market, growing part of retirees - is about 15 years ahead of the situation in the US.