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OECD Economic Surveys Germany - June 2018 Summary

Core Content

The OECD Economic Survey for Germany from June 2018 highlights the country's strong economic performance, high levels of wellbeing, and the need for structural reforms to address future challenges. The report outlines key areas for policy improvement, including fiscal policy, productivity, skills development, and transport reform.

Economic Growth and Wellbeing

• Economic Growth: Germany's economic growth remains robust, driven by strong domestic demand and exports. Record-low unemployment and real wage gains have supported consumption, while low interest rates and immigration have boosted residential construction.
• Wage Growth: Wages are growing moderately, but rising inflation, primarily due to higher oil prices, is eroding real wage gains.
• Current Account Surplus: Germany maintains a large current account surplus due to high savings and low investment, especially in the corporate sector. Structural reforms and fiscal space could help reduce this surplus.
• Living Standards: Germans enjoy high living standards, particularly in areas like employment, earnings, and work-life balance. Disposable household income is more equally distributed than in other large OECD economies, although wealth and market income inequality remain relatively high.

Fiscal Policy and Structural Challenges

• Fiscal Position: Germany's strong fiscal position provides room for government spending on priorities such as education, childcare, and digital infrastructure.
• Fiscal Leeway: Fiscal leeway should be used prudently, considering capacity constraints, to support inclusive growth and green initiatives.
• Recommendations:
  • Lower taxation of low-wage earnings.
  • Increase priority spending on childcare, education, and lifelong learning.
  • Invest in low-emission transport infrastructure.

Productivity Growth and Technology Diffusion

• Productivity Trends: Labour productivity growth has been subdued, which affects income and wellbeing.
• Factors Affecting Productivity:
  • Slow technology diffusion.
  • Skill shortages and limited adoption of new technologies in the public sector.
  • SMEs lag behind in productivity due to limited innovation and resource reallocation.
• Recommendations:
  • Encourage entrepreneurship, especially among women, by improving support and reducing barriers.
  • Promote digital networks and improve competition in the mobile market.
  • Strengthen e-government services to reduce administrative burdens on entrepreneurs.

Preparing for the Future of Work

• Technological Changes: Automation and digital platforms are transforming the nature of work, increasing the demand for both cognitive and non-cognitive skills.
• Job Risks: Jobs with routine tasks are at high risk of automation, particularly in middle-skill occupations.
• Work Arrangements: New forms of work, such as self-employment, require enhanced social safety nets.
• Recommendations:
  • Extend social safety nets to self-employed workers.
  • Facilitate the recognition of on-the-job skills to boost lifelong learning.
  • Offer more modular training programs and support for unskilled adults.

Policies to Improve Skills and Inclusive Growth

• Educational Progress: Germany has made significant strides in reducing the impact of socio-economic background on education outcomes, as seen in improved PISA scores and increased childcare enrolment.
• Gender Equity: Women are as educated as men but are underrepresented in entrepreneurship and have limited career opportunities due to fewer working hours and tax disincentives.
• Recommendations:
  • Lower tax burden on second earners.
  • Increase minimum parental leave for both parents.
  • Raise quality standards in childcare and early education.
  • Expand primary education to full-day programs.
  • Strengthen general education within vocational schools.

Transport Policy Reform for Green Growth

• Transport Emissions: Despite efficiency gains, transport emissions have increased, posing a challenge to climate goals.
• Policy Gaps: Transport infrastructure plans are not aligned with CO2 reduction targets.
• Recommendations:
  • Expand electric charging infrastructure.
  • Introduce congestion pricing.
  • Remove regulatory barriers to ride-sharing services.
  • Promote public transport development.

Key Policy Insights

• Social and Economic Wellbeing: Germany's population enjoys high levels of wellbeing in areas such as personal security, work-life balance, and subjective wellbeing.
• Productivity Concerns: Trend productivity growth has declined, partly due to weak technology diffusion and low investment in SMEs.
• Skills Development: A skilled workforce is essential for future economic growth, but Germany's adult skills are weaker than leading OECD countries.
• Future Challenges: Addressing inequality, adapting to technological change, and ensuring sustainable growth are key priorities for policymakers.

Government Coalition Agreement (Box 1)

• Spending: The government aims to maintain a balanced budget with EUR 46 billion in fiscal space (1.5% of GDP) for 2019–2021, primarily allocated to education, family benefits, and pensions.
• Tax Policy: Plans include reducing unemployment insurance contributions, shifting health insurance contributions, and lowering taxes on low-wage workers. From 2021, EUR 10 billion in income tax reductions are intended for middle-income households.
• Labour Market: Efforts to reduce fixed-term contracts, improve part-time work rights, and facilitate skilled immigration are outlined. The government also seeks to increase women's participation in executive roles.
• Pension Reform: The replacement rate will remain at 48% until 2025, with a cap on contributions at 20%. A pension reform commission will be established post-2025, and a new basic pension for long contributors is proposed.
• Innovation and Entrepreneurship: R&D spending is targeted to rise to 3.5% of GDP by 2025, with a focus on digitalisation and AI. Tax incentives for SMEs and a "One-Stop-Shop" for start-ups are planned.

Main Messages

• Technology Utilisation: New technologies must be more widely adopted to enhance productivity and wellbeing across society.
• Skill Adaptation: Workers must be prepared to adapt through lifelong learning and better skill utilisation.
• Inclusive Growth: Enhancing education and skills for disadvantaged groups will ensure broader access to economic opportunities.
• Policy Adaptation: Labour market regulations and social safety nets must evolve to capture the benefits of technological change.