backed up by the necessary finance, so as not to jeopardise the necessary consolidation of public budgets.
In order to make overall conditions for investment and employment in Germany sustainably competitive,
it is moreover necessary to fundamentally review the system of taxing companies and income from
capital. Such a fundamental reform would aim to increase economic neutrality and remove incentives for
tax planning. Against this background, the German Council of Economic Experts was asked to draw up
an expert opinion on the needs for reform and the possibilities of a reform of corporate taxation and
report by the end of 2005.
Æ Effect on the quality of public finances: The quality of the tax structure has been greatly improved by the
measures described – according to the conceptional requirements of the EU KOM presented to the AG and the
more profound analytical targets presented in the Belgian working paper. For example, the cuts in the tax rates
have reduced the distorting effects of the tax system and at the same time boosted incentives to work and invest.
The tax ratio has reached the historically low level of 21.8% in the meantime. Furthermore, the reduction of tax
privileges has extended the tax base; this also helps to reduce the distorting effects of the tax system further.Quantitative and qualitative consolidation in the stricter sense
The structural reforms of the labour market and the social-security systems, as well as the fiscal-policy
measures, are supplemented by specific (packages of) measures aimed at the restriction of overall
expenditure and the explicit, directly qualitative restructuring of the public budgets.
One example from the recent past of the direct restructuring of public budgets towards a more future-
oriented focus is the Future Investment Programme 2000, in which specific revenues have been
redirected towards a concrete investment use. In this context, all the actual proceeds from the auction of
the UMTS licences – approximately €50 billion – were used to repay debt, while the Federation's
simultaneous interest savings about €2.5 billion per annum were tied to investment and flowed into a
large number of different projects, mainly in infrastructure but also in education, research and
development, and renewable energy.
These forms of qualitative consolidation in the stricter sense are to be further developed in the coming
years. According to the federal government's financial-policy strategy, funds saved by cutting subsidies,
especially in the field of tax privileges, are to be used to strengthen expenditure on (primarily) education,
research and innovation, and to develop measures making it easier for people to reconcile work and
family life. In the education field the programmes' priorities lie in measures to improve facilities for
young children. An important component of the innovation offensive is the mobilisation of the R&D
potential in small and medium-sized companies.
Important successes have already been achieved in both fields:
- In 2003 the Federation and Länder launched the "Investment Programme in the Future of
Education and Childcare". In this €4 billion programme, the government is promoting the
establishment and development of all-day schools. This is based on agreements to "expand and
further develop" new all-day schools, to "create additional places" at existing all-day schools, and
"develop the quality" of all-day facilities. The funds will be available up to the end of 2008. In line
with their federal responsibility for education policy, the Länder are responsible for deciding
which schools and school forms are to be promoted, as well as for choosing the teaching content
and providing the staff. - investment in research and development has been rising again since 1998, so that total expenditure
on R&D as a percentage of the gross domestic product has gone up from 2.31% to 2.55% - Furthermore, the government wants to greatly improve care facilities for children under the age of
three with its new law on the quality-oriented and needs-related expansion of day-care for
children, which has been force since the beginning of this year.