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  Assessment and Recommendations

  While in the beginning of the 1990s economic growth in Germany was stronger than in most other OECD countries on account of the unification boom, growth has faded since then. This reflects in part imbalances in labour markets and in the construction sector that themselves arose from unification, as well as a variety of adverse external shocks. But the difficult adjustment process and the prolonged weakness of domestic demand also point to the need to overcome structural rigidities that impair the resilience of the economy and in particular to strengthen its capacity...

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  Macroeconomic Developments

  The first part of this chapter reviews important aspects of German economic growth in the 1990s. The second part considers more recent macroeconomic developments and forces acting, along with the OECD’s assessment of short-term economic prospects.

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  Fiscal Policy

  This chapter reviews recent budgetary developments and assesses the need for continued fiscal consolidation against the background of slow economic growth and announced tax and spending measures. Balancing the budget in the medium term will need to entail budgetary consolidation involving structural measures, an issue picked up in the next chapter on public sector spending reform.

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  Issues in Public Sector Spending Reform

  The German federal fiscal system is based on budgetary autonomy of the different layers of government while simultaneously attaching a high importance to realising broadly equal living conditions across the federation. The latter is reflected in both a high degree of co-operation and revenue sharing between the authorities and a generous transfer system to promote social cohesion. While the system has been successful in promoting a high standard of living even in regions whose economic capacity is low, tensions have emerged. Firstly, it has been difficult to ensure a sustainable fiscal policy, and the size of the overall deficit makes it difficult for the automatic stabilisers to operate freely. Second, overlapping responsibilities between governments and the financing of public spending programmes via inter-governmental transfers provide individual governments with little incentives to contain costs and demand. Thirdly, social spending often discourages a higher utilisation of labour. Furthermore, public expenditure is going to have to cope with increasing pressure due to the substantial deterioration of the old-age dependency ratio projected for the next years and decades and the continuing fiscal burden associated with reunification....

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  Implementing Structural Reform

  This chapter highlights further policy initiatives relevant for labour, product and financial markets and concludes with a discussion of some issues of sustainable development.

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