Germany should enact economic and social reforms to make its growth path more inclusive and sustainable, OECD says | WPN World People News

Germany’s current economic success offers a good platform for achieving sustainable and inclusive growth, but further reforms will be necessary over the medium and long term, according to the latest OECD Economic Survey of Germany. Among the priorities are making the tax system more socially just and environment-friendly, strengthening the financial sector, so that it is better able to absorb future risks, increasing the contribution of the service sector and creating greater equality of opportunity in the education system and in the labour market.

“Our experience has shown that reforms are usually enacted in times of crisis, as there may be no other option,” said OECD Secretary-General Angel Gurría during the Survey launch in Berlin. “However, reform processes should continue in good times. For Germany, this means that the country should act now to embark on a more inclusive and resilient growth path.”

Reforms over the past decade have enabled Germany to boost job creation and drive unemployment to one of the lowest rates in the OECD area. Problems are posed, however, by the rapid growth of the low-wage sector and the large number of temporary workers. The sharp drop in unemployment has not reduced inequality or the risk of poverty. Upward mobility of low earners has in fact fallen in recent years.

The OECD says Germany should take steps to heal the split in the labour market between employees with permanent contracts, better protection against dismissal and, in many cases, better salaries, and those with temporary contracts, little protection and lower pay. A universal minimum wage set by an independent commission, including experts and social partners, could aid that effort, as could harmonisation of the rules governing employment protection for employees with temporary and permanent contracts. The Survey calls on Germany to combat long-term unemployment, which is still fairly widespread, through targeted hiring subsidies and incentives to obtain educational qualifications.

Also important, according to the Survey, is ensuring that young people have equally good starting conditions for education and careers. The currently strong linkage between social background and pupils’ school performance and prospects must be severed. Besides investment in early childhood education, the Survey calls for more resources for schools with high percentages of socially disadvantaged pupils. It also points out that disproportionately high numbers of children from disadvantaged backgrounds are taught in schools for students with learning difficulties or disabilities, which often restricts their chances of obtaining a good job.

New, higher-quality jobs and better access to the labour market are not only needed to ensure fairness, but are also an economic necessity given ageing of the German population and projected impacts on growth potential and long-term GDP. A slow-growth future will make it harder for Germany to fund public services, notably health care, which are likely to be in greater demand in the future.

The Survey points out scope to lower taxes on labour and reduce welfare contributions, particularly for low earners, as part of efforts to increase growth potential. To offset revenue reductions, taxes on real estate could be increased, on the basis of updated valuations, while tax exemption for profits from the sale of non-owner-occupied properties could be abolished.

Additional scope for growth-enhancing policies could be created by reducing fiscal support for activities that damage the environment (such as tax breaks for company cars and commuting allowances). The tax system could be used to encourage environment-friendly behaviour, by introducing lower road taxes for energy-efficient cars or extending emission-based tolls to light utility vehicles, or even passenger cars.

Reforms in the service sector may also help foster growth. The sector already makes the biggest contribution to the creation of wealth in the German economy. By contrast with manufacturing, productivity in business services has seen relatively little increase over the past ten years. Accordingly, the Survey suggests that the regulation of network industries, independent professions and some manual trades should be further relaxed, to stimulate competition. Potential growth-enhancing measures in this sector ranges from ensuring a level playing field for providers of rail services and a more freely accessible infrastructure for mobile communications (wider rights to issue SIM cards) to the abolition of statutory fee scales for certain professions, such as notaries.

For growth stimuli to have lasting effect, the entire economy must be made more resilient to shocks from the financial sector. With the largest banks heavily leveraged, the paramount task of regulatory authorities should be to ensure that financial institutions possess adequate equity. In the case of large international banks, their leverage ratios should also be kept under surveillance.

The OECD points out the need to establish recovery and resolution methods to ensure that the losses of insolvent banks are offset as fully as possible against their liabilities (bail-in). This should be done in line with the framework of a new EU Directive to be transposed by 2016. The law should clarify that financial stability objectives take precedence over creditors’ rights in the event of a resolution.

Source: Organization for Economic Co-operation and Development