Strengthening the economy, investing in the future
Many people agreed that a booming economy makes a major contribution to wellbeing, along with the right conditions for competition and a climate that encourages innovation and investment. However, some criticised the influence that corporate interests have on policy.
Many people agreed that a booming economy makes a major contribution to wellbeing, along with the right conditions for competition and a climate that encourages innovation and investment. However, some criticised the influence that corporate interests have on policy.
“Many companies and professionals in Germany generate prosperity that benefits everyone. That is nice. Life would be even more worth living if social and economic freedoms were greater than they are now.”from an online response submitted on 21 April 2015
Creating opportunities for inclusive, sustainable growth
Experts and statisticians all agree that real gross domestic product (GDP) is not suitable as the sole indicator of prosperity in society, because prosperity means more than economic growth. The GDP tells us nothing about how many people benefit from growth and to what extent, nor about whether this growth is inclusive, lasting and environmentally friendly.
“We can’t simply demonise growth, but growth must be sustainable.”from the national dialogue event of the German Federal Ministry for Economic Affairs and Energy in Magdeburg on 7 July 2015
However, the gross domestic product is a central and necessary indicator for a country's economic performance. It is given as a per capita figure to make it easier to draw comparisons between rural and urban areas and between countries with high and low population densities.
The growth in GDP per capita shows that Germany is a strong country. Between 1991 and 2018 GDP per capita increased by more than 40 percent.
In the states of eastern Germany the amount of goods and services produced each year that make up GDP has more than doubled since reunification. In 2017 GDP per capita in Eastern Germany was about 75per cent of that of states in Western Germany. The difference between Eastern and Western Germany decreased by five percentage points during the last ten years.
Compared to other countries, Germany has a relatively high GDP per capita, placing 16th out of 192 countries in 2019. The German economy recovered quickly from the effects of the global economic and financial crisis in 2008. Two economic packages introduced by the federal government involving a short-time working scheme and support measures to shore up the banking sector contributed to the recovery. By 2011, GDP per capita had already returned to pre-crisis levels.
What Does the Government Do?
The federal government bolsters economic growth with a wide range of measures and policy instruments. It keeps its finger on the pulse by publishing economic growth forecasts for Germany three times a year. The government uses these reports as a basis for estimating tax revenues and drawing up the federal budget.
Investing in a positive future
Investment is the key to creating a future-proof economy. If we are to enjoy prosperity today and in the future, investment is vital – both public and private, in school buildings, roads and bridges, electricity grids, state-of-the-art factories and powerful information technology.
“Wealth must be earned, which is why it should always be a case of investing first and then redistributing. Otherwise the wealthy country we live in today will be poor tomorrow.”from an online response submitted on 12 June 2015
The investment rate reflects the percentage of economic output that flows into public and private investment. The investment rate is measured via gross fixed capital formation as a percentage of GDP. This indicator is particularly important with regard to future wellbeing.
The investment rate in Germany has stabilised at around 20 per cent since 2002. In 2018 it increased to 20.8 per cent which is the highest level since the early 2000s, but still below the level of the early 1990s, when investment was high in the wake of German reunification.
Compared to other industrialised nations Germany is just above the EU average of 20.6 per cent, with a total investment rate of almost 21 per cent in 2018.
Almost 89 per cent of this investment is private, and around 11 per cent public. Businesses mainly invest in new production facilities and create jobs. The state creates and maintains mobile networks, public service infrastructures and public goods.
Some economists warn that Germany falls short of its potential compared to other countries, particularly in the area of public investment. However, it is difficult to make an international comparison of public investment rates. For example, the public investment rate in other countries may be higher because the state covers more costs that are dealt with privately in Germany.
What Does the Government Do?
With almost 40 billion euros per year, the federal government will invest at a record level in the next years - in strong infrastructure, affordable housing, better education and innovative research. The federal government supports municipalities financially in housing construction or with respect to their expenses related to migration and integration. To promote municipal investment activities in financially weak municipalities, the federal government provides loans over the Municipal Investment Promotion Fund (Kommunalinvestitionsförderungsfonds).
Sound budgeting, retaining scope for action
A sound financial base is essential for maintaining a high standard of living in the long term. Generational equity, ensuring the ongoing viability of the welfare state and reducing public debt – these were all important issues for people who took part in the national dialogue. The money we spend today must be wisely invested and funded through sound revenues.
“A strong economy, secure finances, jobs and a secure pension are important to us.”from an online response submitted on 15 July 2015
The national debt ratio is a way of measuring fiscal sustainability. It compares public debt with economic output (GDP).
After the national debt ratio increased in the wake of the global financial and European sovereign debt crisis, Germany has managed to significantly reduce its national, state and local authority debt burden over recent years. With 60.9 percent Germany is still slightly above the upper debt limit of 60 per cent of economic output that is stipulated in the EU Stability and Growth Pact.1
What Does the Government Do?
In 2014, for the first time in 50 years, the federal government budget was balanced without any new borrowing. Indeed, in 2019 the overall budget for the federal government, states, municipalities and the social insurance system will achieve a surplus for the sixth consecutive year. In the first half of 2019, the surplus amounted to 2.7 per cent of the GDP. The federal government will hold on to the sound and future-oriented budgetary policy.
Promoting innovation and inventive talent
“Innovative culture is lacking in Germany. Not least because people fear loss and have a strong aversion to failure. There is no right to fail. The culture is different in the US. Here we don’t get a second chance.”from the national dialogue at the CDU Wirtschaftsrat in Dresden on 22 September 2015
“We have a high standard of living because many people have good ideas and develop patents. Thanks to them we have become the world champion in exports.”from an online response submitted on 16 August 2015
Views on innovative culture in Germany could not be more divergent. What does the situation really look like?
Economists agree that investment in research and development increases productivity and the competitiveness of economies, in this way creating growth. Participants in the national dialogue also understood the importance of recognising future trends and implementing innovative ideas. People particularly stressed the need for research in the areas of health and the environment.
A major, established and internationally comparable indicator for an economy's ability to innovate is the research and development (R&D) spending as a percentage of GDP.
Expenditure on R&D increased from 2.2 to 3 per cent between 1995 and 2017.2 In 2017, Germany spent about 100 billion euros on research and development. This was eight per cent more than in the previous year and 23 per cent more than ten years ago. With a record amount Germany 6.5 billion euro in the federal budget the German government has a clear investment focus on education and research.
A glance at other EU Member States shows how well Germany fares in terms of overall expenditure on R&D. In 2017, Germany placed fourth among other EU countries, but internationally its spending on R&D lags behind countries such as South Korea (4.22 per cent) or Japan (3.28 per cent).
What Does the Government Do?
With the Excellence Strategy (Exzellenzstrategie) the federal government and the federal states
strengthen cutting-edge research at universities. To further develop future technologies in artificial intelligence (AI) and to make Germany and Europe a leading center for AI, the federal government provides 3 billion euros. The High-Tech-Strategy 2025 is targeting innovation in the development and application of key technologies. To boost companies‘ investment activities and their competitive edge, the federal government provides a tax credit for research and development.
Improving entrepreneurial culture
Small and medium-sized enterprises create 16 million jobs in Germany and supply eight out of ten training places. Business start-ups lead to increased competition. They stimulate innovation, higher productivity and a wider choice of products.
“Entrepreneurs want to be able to act with a greater sense of responsibility instead of being hampered from doing so.”from the national dialogue event of the Deutsche Industrie- und Handelskammertag in Berlin on 9 July 2015
Many small, new start-ups are particularly innovative. The fewer the hurdles they face, the faster they can be up and running. The 2011 EU guidelines on start-ups state that it should take no more than three working days and cost around 100 euros to start a new business.
In light of declining numbers of new businesses, economists are calling for more support for start-ups and a reduction in bureaucratic hurdles for new companies.
The indicator time required to start a business provides information on progress in this area. It measures the average number of days that it takes to complete the administrative steps needed to set up a limited liability company in Germany.
In 2018, it took on average 7.6 days and cost 383 euros to set up a business in Germany. With both indicators, Germany lies above EU-average of 3.1 days and costs of 300 Euro. The time required in Germany is higher than the EU average of 3.3 days and the cost is slightly above the EU average of 320 euros.
In addition, Germany does not offer a one-stop-shop that allows entrepreneurs to register a new business within one day. Germany is the only EU member state that does not meet any of the three targets set out in EU guidelines.
Compared with other countries, Germany provides new entrepreneurs with high levels of legal certainty, but it still needs to improve its entrepreneurial culture. The federal government is keen to encourage and support entrepreneurs. It is focusing on improving access to appropriate financing for new entrepreneurs.
What Does the Government Do?
The third Reduction in Bureaucracy Act (Bürokratieentlastungsgesetz) relieves German companies of 1.17 billion euros per year. To improve access to capital for innovative technology-oriented growth companies in Germany, the federal government strengthens start-up culture with the Start-Up-Initiative and the KfW capital funds.