Options for Creating Fiscal Room for Investment and Other Spending Needs

Germany needs substantially higher levels of public investment. At the same time, the country is facing rising pension, healthcare, long-term care, and defense expenditures. If Germany were eventually to ease moderately its national fiscal rules, as recommended by IMF staff, this would create some fiscal room but would not be sufficient on its own. This paper therefore explores options for Germany to generate additional fiscal room by reducing its public spending and increasing its revenues, while minimizing the associated costs to the economy. To aid this exploration, this paper also examines areas where Germany's spending and revenue levels stand out in international comparison. The options for generating fiscal room include: (i) finding efficiencies in healthcare spending; (ii) stabilizing the finances of the social security system; (iii) eliminating environmentally harmful subsidies; (iv) raising revenues from goods and services taxes; (v) raising property taxes and closing loopholes in inheritance taxes; and (vi) earning higher returns on the government's financial assets.