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Cutting corners

June 7, 2010

The German government is embroiled in day two of discussing ways to bring down the country's massive budget deficit. The savings plan may include cuts to social welfare benefits or tax hikes.

Merkel, right with Foreign Minister and head of the FDP party, Westerwelle
Merkel, right with foreign minister and head of the FDP party, WesterwelleImage: AP

Angela Merkel has convened the German government in her chancellery in order to come up with a way to meet its self-imposed austerity plan - to save 10 billion euros ($12.2 billion) in the state budget every year from 2011 to 2016.

The target is determined by the so-called Schuldenbremse [debt-brake], a constitutional regulation the German parliament imposed last year which forces the government to limit its debts to a maximum of 0.35 percent of the gross domestic product (GDP).

The federal budget deficit currently stands at 120 billion euros, and Germany is also on track to exceed the European Union's budget deficit limit of three percent of GDP in 2010.

Money-saving ideas have been emanating from government ministers and other employer's associations for weeks leading up to this weekend's summit, but each suggestion has caused bitter objections. These have mainly come from left-of-center opposition parties, but conflict has also arisen within the governing coalition of the Christian Democratic Union (CDU) and Free Democratic Party (FDP).

Karl-Theodor zu Guttenberg
Guttenberg wants to break Germany's attachment to conscriptionImage: AP


The idea that has attracted the most attention lately is Defense Minister Karl-Theodor zu Guttenberg's proposal to scrap Germany's military draft. The German military is expected to account for a 1-billion-euro annual cut, and a Defense Ministry official said on Wednesday that the complete abolition of conscription "could save up to 400 million euros per year."

Germany has clung to conscription for decades as part of its "citizens in uniform" concept for the armed forces, but its military use is often questioned, and most European countries have long since scrapped it.

But while the FDP supports Guttenberg's proposal, his own party, the Christian Social Union (CSU) has raised objections, and Merkel herself said this was not a measure that could simply be pushed through in the meeting.

There have also been media reports that Guttenberg intends to radically cut Germany's standing army from 250,000 to 150,000 troops, and cancel or reduce orders for the MEADS missile defense system and the Eurofighter aircraft.

Social welfare

Germany's relatively generous social benefit system has always been a target for budget cuts, the last major one being the wholesale unifying reform known as Hartz IV, which combined unemployment benefits with social welfare when it came into force in 2005.

Substantial cuts to Hartz IV are currently being discussed, though they will mostly affect its bureaucracy. One proposal, reported in the daily newspaper Bild, is to scrap parental leave payments, or Elterngeld, for the long-term unemployed. This would save 400 million euros a year.

German employers have come up with a raft of suggested cuts in the unemployment benefit system, including shortening the initial payments for older people who lose their jobs from 24 months to 12 months. The federation of German employer-associations (BDA), which floated this idea, said this would save 1.5 billion euros a year.

Another proposal that has been on the table since coalition government negotiations last October is to increase employees' unemployment insurance contributions from 2.8 percent to 4.5 percent.

Demonstrators against extra health insurance fees
The idea of extra health insurance payments is not popularImage: Kai Löffelbein/Campact


Health Minister Philipp Roesler, of the FDP, has garnered much criticism for his attempts to introduce an additional monthly fee of 30 euros per head for all state health insurance patients. This is intended to shore up an 11-billion-euro hole in Germany's health system. But the FDP's coalition partners, the CSU, have refused to discuss this categorically.

A recent meeting of the government's health policy makers, attended by Roesler and CSU Social Affairs Minister Markus Soeder, reportedly decided that four billion euros should be saved over the next year, a measure that would require freezing the payment rates to doctors and hospitals.

Industry and Energy

The government currently pays heavy subsidies to keep certain industries going, and one of the most costly is coal mining. Some 13.8 billion euros of taxpayer's money is planned to flow into the coal mining industry from 2009 to 2018, a subsidy that Economy Minister Rainer Bruederle has recently singled out as unsustainable.

Bruederle has also proposed a new tax on combustible material for nuclear power companies. This is meant to offset the increased profits that energy companies are expecting after the government recently prolonged the lifespan of certain nuclear power stations.


Transport Minister Peter Ramsauer is expected to propose an increase in tolls for heavy goods vehicles at this weekend's meeting. This is one of the least controversial proposals on the list, as it generates revenue from abroad. (Up to 35 percent of truck miles on Germany's roads are completed by foreign haulage companies.) A higher toll would also have an environmental benefit, as it would encourage more efficient freight transport. But Ramsauer has ruled out introducing a toll on cars.

Industrial worker
Certain industry subsidies are set for the chopping blockImage: picture-alliance/ dpa


CDU budget expert Norbert Barthle recently called for a review of education policy with a view to making savings, but immediately received heavy criticism from both the FDP and opposition parties. FDP education spokesman Patrick Meinhardt pointed out that a 12-billion-euro increase in the education budget up until 2013 was a condition of the coalition contract.

Tax hikes

On obvious target for tax increases in Germany would be high earners. People earning more than 250,000 euros a year currently pay 45 percent income tax. The Cologne Institute for Economic Research recently calculated that either lowering this top bracket to 125,000 euros a year, or increasing the tax rate by 2.5 percent, would bring the state an extra half a billion euros a year.

But such a proposal would run into heavy opposition from the FDP, whose election campaign was underpinned by demands for tax reductions.

There is also serious debate about the tax relief granted to long-distance commuters. Should this be scrapped completely, some experts have suggested that the state could make as much as 4.4 billion euros more every year.

Another tax target is the bonuses paid to those working on Sundays, public holidays and at night. These are often tax-free, at an estimated cost to the state of 2.1 billion euros.

Author: Ben Knight
Editor: Rob Turner