How can public sector reform make fiscal policy more effective?
While most consolidation measures that are being phased in have a lasting effect, there is a need for more fundamental spending reform in order to address a number of counterproductive features of Germany’s public sector. In their present setting, Germany’s federal relations make it difficult to find the necessary political consensus for fiscal reforms, often involving complicated mediation processes between the Bundestag and the Länder chamber of Parliament (Bundesrat), whose outcomes are hard to predict. The working of market forces is hampered by a high tax-wedge on labour while persisting subsidy programmes reduce economic efficiency. Parameters of important ageing-related spending programmes are not sufficiently adjusted to predictable demographic changes and make future contribution changes likely. Special tenure and pension schemes for civil servants reduce labour mobility and make it more costly to reduce public sector employment. Measures which address these issues are explain
