At the same time, the tax ratio and rate of levies rose sharply, and extensive government transfers to the
former East Germany in the first half of the nineties were largely financed by rapidly rising government
indebtedness (the debts of the overall public budget rose from approx. 40% to about 60% of GDP
between 1991 and 1998).
The need for structural reforms on the labour market and in the social-security systems, too, became
increasingly evident, not only as a result of rising unemployment levels and higher social-security
contributions, but also in view of demographic developments.
Against this background of a difficult overall economic situation, the federal government has developed
a financial- and economic-policy strategy based on three pillars – structural reforms, tax cuts and
consolidation – in which measures needed to limit the government debt are backed up by reforms aimed
at strengthening the forces of growth. The main elements of this three-pronged strategy are the Agenda
2010, the 2000 Tax Reform and quantitative and qualitative consolidation measures.
These three elements have an effect on the quality of public finances in the sense of a change in the
functional structure of public budgets. They can be roughly divided into two groups: one that has a direct
effect and one with an indirect impact. The effects of the structural reforms on the quality of public
budgets are essentially indirect: the burdens on public budgets will be reduced in the medium and long
term by social transfers; incentive structures and productivity are being improved; and there will be
structural shifts between the private and public financing of social security. The result will be a positive
long-term effect on production potential. On the other hand, the tax-policy reforms and the measures
aimed at quantitative and qualitative consolidation in the stricter sense will make a direct contribution
towards improving the quality of public budgets.
Agenda 2010 – structural measures
With the Agenda 2010, the federal government has implemented a package of structural-reform measures
- as an integral part of its financial- and economic-policy strategy – that focuses most urgently on the
labour market and social security and aims to create a new balance between government safeguards
and increasing citizens' personal responsibility.
Labour market
The new labour-market policy is based on the "four laws for modern service providers in the labour
market", whose aim it is to reduce labour costs and create more incentives for people to take up
employment. The idea is to gradually replace the present system of government support for the
unemployed by a system that helps people get jobs and makes job centres more efficient. Alongside
measures aimed at improving and speeding up placement services, the reforms contain sweeping changes
to the systems for granting substitute wage payments and supplementary benefits. Supplementary
benefits and unemployment relief – hitherto separate, parallel schemes – were merged on 1 January
- This reorganization ended the former coexistence of two state welfare benefits and the related
shunting of costs between different agencies: the municipalities and the Federation.
Æ Effect on the quality of public finances: Although these structural-reform measures were not explicitly
planned with the aim of improving the quality of public budgets, they nevertheless indirectly contribute towards a
sustainable increase in the quality of overall public finances. On the one hand, the change in the system aims to
reduce the total amount the government spends on benefits; on the other, the pure transfer payments will be
replaced by payments which encourage productive work and improve resource allocation.Statutory pensions and health insurance
The aim of the reforms in the field of pensions and health insurance is to place the social-security
systems onto a solid financial basis in the medium and long term. In the sense of a direct and indirect
qualitative improvement of public budgets, this is achieved on the one hand by making changes to the