State as a whole
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004Leisure, sport, culture and religion 1.9 1.8 1.8 1.7 1.5 1.5 1.5 1.5 1.5 1.6 1.5 1.5 1.4 1.4Education 8.9 9.1 9.3 9.2 8.0 9.0 9.1 9.0 8.9 9.3 8.7 8.6 8.5 8.4
Social security 39.4 39.9 41.5 42.4 37.9 44.7 45.3 45.1 45.0 47.7 45.1 46.1 46.6 47.3(^1) Entry of the proceeds from the auction of the UMTS licences
(^2) Takeover of the Treuhandanstalt's liabilities
Table 3: Public expenditure by economic classification, share of total expenditure
State as a whole 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
Gross capital formation + Acquisitions less
disposals of land and other tangible non-
produced assets
5.6 5.8 5.4 5.1 3.8 4.0 3.7 3.6 3.7 -1.7^1 3.5 3.3 2.9 2.8
Compensation of employees 19.0 19.1 18.9 18.4 16.0 17.7 17.6 17.3 17.1 17.9 16.5 16.3 16.1 16.1
Subsidies 4.6 4.0 3.8 4.3 3.8 4.0 3.7 3.8 3.7 3.7 3.3 3.0 2.8 2.7
Investment income 5.8 6.7 6.6 6.6 6.4 7.1 7.0 7.0 6.5 7.0 6.4 6.1 6.1 6.1
Social benefits and social transfers in kind 47.1 48.6 49.6 50.9 45.6 53.6 54.4 54.1 54.1 57.3 54.7 55.7 56.4 56.8
Other current transfers 3.9 2.9 3.2 3.0 2.2 2.6 2.8 3.0 3.4 3.8 3.5 3.5 3.7 3.7
Capital transfers 4.2 3.4 3.3 2.8 14.6^2 2.6 2.5 2.9 2.8 3.2 3.6 3.4 3.4 3.2
Intermediate consumption + Other 9.7 9.5 9.2 8.9 7.6 8.4 8.3 8.4 8.6 8.9 8.5 8.7 8.5 8.6
Percentage of consumption expenditure 41.2 41.5 40.7 40.7 35.7 40.2 40.1 39.9 40.1 42.1 39.9 40.0 39.8 39.8
(^1) Entry of the proceeds from the auction of the UMTS licences
(^2) Takeover of the Treuhandanstalt's liabilities
At the same time, the consequences of the economic stagnation of the past few years can also be clearly
seen, leading to a rising level of debt and a simultaneous increase in social-security spending. Since
1991, the percentage of expenditure allocated to social security has risen from 47.1% to 56.8%. This
development is all the more serious because it has been accompanied by a decline in investment. The
percentage of expenditure on "Gross capital formation + Acquisitions less disposals of land and other
tangible non-produced assets" has fallen from 5.6% to 2.8%.
There are many reasons for the described development. The exposure of the German case reveals that the
financial- and economic-policy strategy based on three pillars structural reforms, tax cuts and
consolidation clearly aims at strengthening long-term growth. The main elements Agenda 2010, the
2000 Tax Reform and quantitative and qualitative consolidation measures influence the quality of public
finances by changing the functional structure of public budgets, directly and indirectly.
The reform measures are partly of a structural nature, so that their effect will be medium-term. From
these structural reforms short-term improvements on the expenditure side are therefore not to be
expected. In addition, the effects of economic stagnation have to be taken into account. These
automatically lead to higher expenditure and lower revenues in the social-security systems. Revenue
development has not kept pace with the contribution to consolidation on the expenditure side, resulting in
rising debt.
Furthermore, a considerable share of public expenditure is laid down by law and can therefore not be
reduced at short notice, so that in some cases consolidation measures to limit public indebtedness had to
taken in flexible expenditure areas such as investments. Both effects have a negative impact on the
quality of public finances and simultaneously increase the amount of effort that will be required in the
future to improve the quality of public budgets.
Fundamentally the budgetary scope for short-term, explicit restructuring measures in public budgets has
narrowed over the past years, since major steps have already been undertaken to reduce expenditure
through consistent cuts in subsidies, reductions in personnel costs and privatisations. On the one hand,