The Act on the Modernisation of Statutory Health Insurance (GMG), which has been in force since
January 2004, is aimed at improving efficiency and quality with medium term financial objectives.
Central elements of the reform package include structural measures to strengthen both competition (e.g.
amending the regulations on the administration of medicines) and the personal responsibility of insured
people, as well as new rules on financing. The changes in the financing of the health services provide
among other things for greater participation by the insured people themselves – by excluding certain
services and requiring higher co-payments – as well as federal government grants to cover benefits not
calculated according to actuarial principles.
The measures will help improve revenues and limit expenditure on benefits and administrative costs, thus
creating the necessary scope for a gradual consolidation of the health insurance funds. At the same time
they will serve to stabilise non-wage labour costs. However, it is also evident that further reforms are
necessary to improve the efficiency of service provision. Future reforms of the health system will have to
develop financing and control mechanisms which meet the demands of sustainability, reduce the burdens
on the labour factor and achieve greater distribution equity.
Æ Effect on the quality of public finances: With a view to the aspect of quality it should be made clear that the
reforms of the social-security systems (health, pensions) outlined above primarily achieve a structural reduction
in past-oriented expenditure commitments, while at the same time improving the revenue base of public budgets
in a future-oriented way. Calculations on the sustainability of public finances corroborate the success of the
measures that have been carried out. For example, the IMF and the Ifo Institute, Munich, among others, confirm
that the reforms have contributed to a marked improvement in the sustainability indicators. According to
calculations by the Ifo Institute, the reforms have reduced the sustainability gap by about 20%.2000 Tax Reform
The role of taxation policy within the framework of the federal government's economic- and financial-
policy strategy is to ensure sufficient finance for public expenditure that has been legitimised by
parliament and to contribute towards more growth and employment. Achieving these two objectives
simultaneously requires a tax-system structure that is characterised by low tax rates and a broad
assessment basis and is able to adjust to changing overall conditions – such as demographic
developments or the increasing internationalisation of the economy. Furthermore, the tax system should
be simple and avoid not only macroeconomic efficiency losses caused by distorting regulations, but also
opportunities tax evasion.
Tax conditions in Germany have improved in many ways since the 2000 Tax Reform, the last stage of
which came into force on 1 January 2005. Figure 2 shows the development of income-tax and corporate-
tax rates since 1998. The first-bracket income-tax rate has been cut by more than 40% to 15% since
1998; in the same period, the top rate has been reduced by more than 20% to currently 42%. Moreover,
the basic tax-free amount (€7,644) is now more than 20% higher than in 1998.