National Reform Programme 2016

Reform Programme 2016

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A . Macroeconomic development . . . 5

B . The German current account surplus . . . 6

Determinants of the German current account surplus

6

The spillover effects within the euro area are not to be overestimated

8

II . Actions to tackle primary macro economic challenges . . . 9

A . Strengthening investment, preserving the stability of public finances . . . 9

Investment strategy

9

Strengthening public-sector investment in infrastructure, education and research

10

Sound fiscal policy creates scope for action

12

Boosting the efficiency of the tax system to promote private investment

12

Further measures to strengthen private investment

14

Making the energy transition investor-friendly, increasing cost efficiency

15

Restructuring fiscal relations between the Federal and Länder governments

16

B . Increasing labour force participation, integrating refugees as well as possible . . . 17

Further increasing labour force participation, creating incentives for later retirement

17

Integrating refugees into the labour market as well as possible

19

Reducing the tax and contribution burden particularly for low-wage earners, addressing the effects of fiscal drag

19

Examining the fiscal treatment of mini-jobs

22

C . Strengthening competition . . . 22

Modernising public procurement

23

Action to further stimulate competition in the services sector

23

New market entrants in the retail sector

24

Removing barriers to competition in the railway market

24

III . Europe 2020 headline targets: progress to date and measures . . . 27

A . Fostering employment . . . 27

Strengthening the framework to reconcile family, care and work commitments, facilitating the immigration of skilled workers, promoting initial and further training

27

Shaping a fair and flexible labour market

30

B . Improving conditions for innovation, research and development . . . 31

The Federal Government Strategy for Research and Innovation

31

Promotion of research and development by the Federation and the Länder

31

Using the opportunities of the digital transformation

32

C . Reducing greenhouse gas emissions and increasing energy efficiency and energy from renewables . . . 32

D . Improving education levels . . . 34

E . Promoting social inclusion in particular by reducing poverty . . . 34

Promoting integration into the labour market and society

35

Keeping housing affordable, strengthening social urban development

35

IV . Drafting the NRP 2016: process and stakeholders . . . 37

D. Improving education levels

67 E. Promoting social inclusion in particular by reducing poverty

76

Diagram 1: Development in the employment rates in Germany and the EU

18 Diagram 2: Annual median equally-funded social security contribution rates as a percentage of gross

assessable earnings

21

Box 1: 2015 country-specific recommendations of the Council of the European Union for Germany

9 Box 2: Federal Government measures to promote the labour market integration of refugees

20 Box 3: Implementation of the German Action Programme 2015 for the Euro Plus Pact

25

Overview 1: Selected key figures for macroeconomic trends in the Federal Republic of Germany

5 Overview 2: Selected Federation measures to relieve the Länder and municipalities since 2013

13 Overview 3: Quantitative goals defined under the Europe 2020 strategy and current

progress towards goals

28

1. Germany is enjoying solid growth. Despite the difficult international environment, Germany’s economy grew by a total of 1.7 % last year. Unemployment is at its lowest level since the country’s reunification. Last year, real gross wages and salaries per employee recorded the highest increase for more than two decades. With a surplus of 0.7 % of the gross domestic product, the budget of the Federation, the Länder, the municipalities and the social insurance funds again achieved the goal of a close-to-balance budget or a budget surplus for the fourth year in succession in 2015. At the same time, the high influx of refugees, demographic change and digitisation, in particular, present enormous challenges for German economic policy. To meet these challenges, it is essential to put growth dynamism on a permanent footing and increase growth potential further.

2. Prosperity, growth and employment in Germany are inseparably linked to the political and economic develop- ment in Europe. The Federal Government therefore calls for a further development of the European Economic and Monetary Union, the strengthening of joint institutions and the establishment of incentives for sustainable action by the Member States of the European Union. The long-term vision of the institutional future of the Economic and Monetary Union includes a willingness to consider treaty changes. For the time being, however, an important step is to implement measures that have already been adopted and to credibly comply with and apply existing rules and procedures.

3. This also includes economic and fiscal policy coordina- tion of the Member States of the European Union within the framework of the European Semester, including the procedure to prevent and correct macroeconomic imbal- ances. In November 2015, the European Commission decided to subject Germany, along with 17 other Member States, to an in-depth review as part of the Macroeconomic Imbalance Procedure. As was the case last year, Germany’s consistently high current account surplus triggered the in-depth review. The European Commission identifies imbalances in the in-depth review for Germany.

4. The Federal Government supports the European Com- mission in the consistent application of the Macroeconomic Imbalance Procedure. It shares the European Commission’s opinion that the German current account surplus is high but that the imbalance is not excessive. A large part of the German current account surplus is explained by factors

which economic and fiscal policy measures in Germany can do little to influence in the short term. These include the favourable euro exchange rate and the sharp drop in oil prices, but also fundamental factors such as demographic development.

The Federal Government focuses economic policy on invest- ment and sustainable growth, thereby helping to reduce the current account surplus. For example, it has increased public investment made by the Federation and will provide more than €45 billion in financial relief to the Länder and municipalities in the 2013 – 2019 period to boost their scope for investment. The Federal Government is also making special efforts to promote private investment. The euro-area economy can also benefit from higher invest- ment in Germany. In this respect, it must be noted that the effects of a further expansion of public sector investment in Germany on the current account surplus and the eco- nomic development in other European countries are lim- ited.

This National Reform Programme (NRP) 2016 is a corner- stone of the 2016 European Semester which the European Commission launched with the presentation of the Annual Growth Report on 26 November 2015. It contains the Fed- eral Government’s response to the European Commission’s country report of 26 February 2016, including the in-depth review in the Macroeconomic Imbalance Procedure, with a particular focus on the action Germany will take to address the macroeconomic challenges identified in the country report. This more future-oriented direction of the NRP was agreed last year to strengthen the European Semester.

The 2016 NRP also reports on the implementation of the

country-specific recommendations of the Council of the

European Union for Germany for the 2015 – 2016 period

issued on 14 July 2015, and on progress and measures under

the Europe 2020 strategy. Furthermore, the 2016 NRP also

presents the measures to implement the German Action

Programme 2015 for the Euro Plus Pact. Given the more

future-oriented direction of the report overall, the Federal

Government is not adopting a new Action Programme

with the 2016 NRP. Measures introduced to implement the

Action Programme 2015 for the Euro Plus Pact are pre-

sented throughout the report and are summarised in Box 3

in Section II. The 2016 NRP is aligned with the priorities set

out in the Annual Growth Report and with the conclusions

of the European Council of 17 and 18 March 2016.

A. Macroeconomic development

5. The German economy is in good shape. Macroeconomic capacity utilisation is at a normal level. For the first time in the history of the Federal Republic, the number of economi- cally active persons rose above 43 million in annualised terms, and the number of unemployed was at the lowest level since 1991. Cyclical stimuli are currently deriving chiefly from private and public spending on consumption and from investment in house-building, which is also receiving an additional stimulus from the high influx of refugees.

The upturn in the German economy softened somewhat in the second half of 2015. The slower growth in the emerging economies meant less dynamic exports and corporate investment. However, industrial demand picked up again towards the end of the year. The labour market continued to develop favourably right up to the end of the year.

6. In its annual forecast of 27 January 2016,

the Federal Government expects an annual average increase in gross domestic product of 1.7 % for 2016 (cf. Overview 1).

7. The continuing expansion of employment, together with significant rises in income, forms the foundation of the ongoing strong dynamism in Germany’s domestic econ- omy. As in previous years, the additional employment will chiefly be created in the services sectors. The large influx of refugees is unlikely – not least due to the length of proce- dures – to have much of an impact on the labour market in the first few months of the year. In conjunction with the moderate rise in the price level, the expected wage increases will result in a tangible rise in real wages, although this will be somewhat smaller than last year in view of the slowly rising price level. With the increase in child benefit and the regular adjustment in pensions, this year will see a signifi- cant increase in monetary welfare benefits as defined under the national accounts. Together with the reductions in wage and income tax, this boosts disposable income. The transfers to refugees in Germany to secure a minimum subsistence level also contribute to increasing disposable income when considered overall. The savings ratio will be somewhat lower than last year. There will be clear increases in consumption by private households and in investment in housing construction. Public-sector consumption will

1 A detailed account of the Federal Government’s macroeconomic projection, which is based in particular on the Code of Conduct for the sta- bility programmes of the Member States of the euro area, is provided in the 2016 German Stability Programme, which will also be presented to the European Commission in April. The Federal Government’s spring projection, which is expected to be released on 20 April 2016 – and therefore after the adoption of the 2016 NRP by the Federal Cabinet – cannot be taken into consideration here.

Overview 1: Selected key figures for macroeconomic trends in the Federal Republic of Germany

1 Up to 2015 results of the Federal Statistical Office; National Accounts Status: January 2016.

2 In relation to the total labour force.

3 Absolute change (stocks/external balance) in per cent of pre-year GDP (= contribution to change in GDP).

2014 2015

Annual projection 2016

Percentage change on preceding year

Gross domestic product (GDP), output approach

GDP (real) 1.6 1.7 1.7

Total employment 0.9 0.8 0.9

Unemployment rate in % (Federal Employment Agency definition) ² 6.7 6.4 6.4

GDP by expenditure (real)

Private consumption expenditure 0.9 1.9 1.9

Machinery and equipment 4.5 3.6 2.2

Construction 2.9 0.2 2.3

Domestic demand 1.3 1.6 2.3

Exports 4.0 5.4 3.2

Imports 3.7 5.7 4.8

External balance of goods and services (contribution to GDP growth) ³ 0.4 0.2 -0.4

Total gross wages and salaries per employee 2.7 2.9 2.6

abrupt and marked fluctuations in the oil price or the exchange rate could influence the cyclical development.

The change in interest rate policy in the United States can result in capital flows and thus trigger turbulence on the raw materials, financial and foreign exchange markets.

B. The German current account surplus

10. In the context of the Macroeconomic Imbalance Proce- dure, the European Commission identified imbalances in its in-depth review for Germany of 26 February 2016. In its review, the European Commission specifically examined Germany’s current account surplus. According to the Ger- man Bundesbank, Germany’s current account surplus in 2015 stood at €257 billion, or 8.5 % in terms of gross domestic product. In its annual forecast, the Federal Gov- ernment projects a lower current account surplus for 2016, expecting it to drop to 7.8 % in relation to the nomi- nal gross domestic product (GDP) due to the significant increase in imports. A further decline is expected for 2017.

11. Germany’s current account surplus in relation to the euro area has already decreased considerably in recent years. Despite a slight increase in the German current account surplus with the euro area in 2015, in relation to GDP it was still only half as high as it was in 2007. Last year Germany sourced roughly 38 % of its imports from coun- tries in the euro area. The share is close to 60 % for all EU Member States. At the same time, over 40 % of German exports consist of imported intermediate goods and ser- vices. Therefore, both the euro-area countries and the other EU Member States benefit from the success of German exporters in countries outside the EU.

Determinants of the German current account surplus 12. The German current account surplus is driven by both temporary and fundamental factors. According to estimates of the Federal Government, roughly one quarter of the cur- rent account balance can be attributed to the current favourable exchange rate and the sharp drop in oil prices.

As soon as these developments abate, a decrease in the cur- rent account surplus can be expected. Furthermore, a large proportion of the surplus is explained by fundamental fac- tors. Like the International Monetary Fund,

the Federal increase at a faster rate in 2016 compared with the previous

year. The above-average rise is primarily attributable to increased spending on welfare benefits in kind and other inputs. These areas are also characterised by spending as a result of the high influx of refugees.

8. Recovery in the euro area is consolidating, but the external economic environment remains fragile due to considerable geopolitical tensions and a slowing of growth in some emerging economies. According to the projections of inter- national organisations, growth in the global economy and world trade will be stable at a low level this year. A slight acceleration in the global economy and world trade is anticipated for 2017. A moderate increase in German exports can be expected on account of the low external value for the euro against the U.S. dollar. As demand picks up speed, companies will gradually step up their investment over the course of the year. The robust growth in overall demand is stimulating imports. This more than offsets the positive stimulus from demand for exports. In view of the clear rise in imports this year, the German current account surplus in terms of gross domestic product will be lower than last year.

Inflationary tensions are not expected. Macroeconomic capacity utilisation will be generally normal. Profits will increase appreciably this year, not least due to low oil prices. Compensation of employees is likely to increase on almost the same scale as entrepreneurial and property income. Unit wage costs are likely to rise moderately.

9. In the view of the Federal Government, and given the assumptions cited above, the underlying course indicated by the annual projection is the most likely development of the German economy. The estimate does of course involve uncertainties. This is particularly true of the development and effects of the influx of refugees. Opportunities for an economic development which is more favourable than anticipated can particularly be found on the domestic side.

Stimulation could derive from the measures to boost investment in Germany and from a stronger recovery in Europe. Furthermore, the stimuli – not least crude oil prices, the exchange rate and economic policy – could have a stronger impact than assumed. On the other hand, the risks in the external economic environment remain. A worsening of the geopolitical conflicts or a greater slow- down in growth in the emerging economies are some of the main risk factors for the economic development. Also,

2 Cf. “2015 Germany: Staff Report for the 2015 Article IV Consultation”, IMF, June 2015, https://www.imf.org/external/pubs/ft/scr/2015/

cr15187.pdf.

then reversed when the society has aged to such an extent that it tends to increasingly eat into its savings. Against this backdrop, no significant changes in the savings and invest- ment behaviour of private households can be identified in Germany in the current low-interest environment and are also not expected over the medium term.

16. A considerable share of Germany’s present current account surplus is driven by investment abroad. Here, stra- tegic business decisions with regard to new market devel- opment play just as much a part as expected returns on investment. In principle, (financial) capital is very mobile and is channelled to wherever higher returns can be expected. Returns are generally lower in developed national economies with a high capital intensity than in economies still in the process of catching up. As a net capital provider, Germany can share in the potentially more dynamic eco- nomic development of other countries.

17. Further to this, a not insubstantial share of the German current account surplus can be explained by existing exter- nal assets. Capital income from accumulated (net) external assets influences the current account via primary income.

According to preliminary data, Germany’s net external assets at the end of 2015 amounted to roughly €1.49 trillion (around 49 % in relation to GDP) and primarily consisted of direct investment and other investments. As external assets have increased, so too has the balance of primary income, rising from -€26 billion in 2002 to €63.7 billion in 2015.

This alone contributed to a current account surplus of 2.1 % in relation to nominal GDP in 2015. This is equivalent to roughly one quarter of the total current account balance.

18. In its criticism of the German current account surplus, the European Commission also cites weak domestic demand, driven by economic policy, as an important influ- encing factor. According to the European Commission, this weak domestic demand is a result of the low level of public-sector investment, the unfavourable conditions for private investment and the reforms of the labour market and tax system in the 2000s which also further increased the competitiveness of German businesses. The weak invest- ment trend due to the construction boom in the early to mid 1990s following reunification can, however, only explain a small part of the current surpluses. In the Federal Government’s opinion, only a good half a percentage point of the past surplus can be attributed to lack of investment or earlier structural and labour market reforms. On the other hand, the deleveraging process of businesses follow- ing the global financial and economic crisis is likely to be a Government is of the opinion that roughly one half of the

current account surplus is driven by these factors, which is considerably higher than the estimates of the European Commission. As a highly developed industrialised country in a globalised world, Germany has been a net capital pro- vider for a long time, as emerging markets offer attractive investment opportunities with higher returns. The external assets accumulated as a result of earlier current account surpluses mean that Germany, on balance, receives consid- erable investment income from abroad, which drives the current account balance up further. The demographic development and the increased aggregate savings in Germany such development entails are also contributing factors. Further to this, the current account balance also reflects the successful globalisation strategy of German businesses which, with their special merchandise structure, serve the international demand for intermediate goods and investment goods.

13. Germany’s price competitiveness – measured against 56 trade partners using the real, effective euro exchange rate (calculated on the basis of the consumer price index, trade- weighted) – has improved by around 5 % since early 2014.

Depreciation causes export goods to become cheaper and import goods to be more expensive. The subsequent response in terms of quantity to the change in export and import prices results in an increase in the current account balance.

14. The current low commodity prices – particularly the dramatic drop in the price of oil – are reflected in the Ger- man current account through terms-of-trade effects. As a net importer, Germany benefits from the lower import prices for crude oil and gas as a result of the better ratio of export prices to import prices. For example, Germany’s oil bill – i. e. the value of total crude oil imports – in 2015 is likely to be down by around €16 billion, or one third, com- pared with the previous year, relieving the burden on both producers and consumers in Germany.

15. The demography of a country is a key fundamental fac-

tor influencing the current account. A country’s current

account is influenced by the current structure of the popu-

lation. In addition, expectations regarding the future devel-

opment of the population structure affect saving and

investment behaviour, which is ultimately reflected in the

current account. Societies expecting a continued rise in the

old-age dependency ratio tend to have increasing savings

rates and decreasing domestic investment, which in turn

favours current account surpluses. These surpluses are only

The spillover effects within the euro area are not to be overestimated

20. It is important not to overestimate the possibilities, described by the European Commission, by which an expan- sion of investment in Germany can contribute to overcom- ing the sluggish growth in other European countries. While model-based simulations confirm that the euro-area econ- omy is likely to benefit from higher public-sector invest- ment in Germany, the positive growth effects for the euro area are, however, limited.

Own studies on the spillover effects of higher public-sector investment in Germany on the economy of the euro area, based on an international macroeconomic model, suggest that the euro-area economy would benefit from greater demand in Germany both through the direct trade channel and through increasing price competitiveness compared with Germany. Overall, however, this will not make a signif- icant contribution to increasing the economic performance of other euro-area countries. For example, if public-sector investment in Germany were increased by 1 % of GDP each year in the years spanning 2015 – 2018, at around 0.1 % on average throughout this period the spillover effect on the GDP of the remaining euro area would only be marginally positive. Furthermore, the current account of the euro area (excluding Germany) would be likely to improve slightly by 0.1 percentage points. The German current account surplus would decrease by a solid half a percentage point. Similar model calculations performed by the European Commis- sion suggest a slightly higher spillover effect of 0.25% on the GDP of the remaining euro area. However, these effects must be deemed quite weak given the considerable fiscal stimulus which would significantly exceed even the scope of the German debt rule that the European Commission believes to exist.

far more significant influencing factor. However, this pro- cess has slowed considerably in recent times, which should play a part in reducing the current account balance.

19. The Federal Government pursues a policy that seeks to increase competitiveness and create a more dynamic domestic economy in order to strengthen the growth forces in the economy. In addition, after a longer period of wage moderation, collective agreements in recent years are again increasingly aligned to medium-term productivity development. As a result, there is an appreciable increase in real wages, which is also buoyed by the introduction of the statutory minimum wage. Together with the extremely positive developments on the labour market, this has con- tributed to a significant upturn in private consumption.

This trend is likely to continue and have the effect of reducing the current account surplus. Furthermore, con- trary to the information presented in the European Com- mission’s country report for Germany, gross public-sector investment increased – rather than declined – by 4.2 % in 2015. The investment ratio of the state remained stable in 2015 compared with the previous year.

The German current account surpluses are explained, in particular, by factors which economic and fiscal policy measures in Germany can do little to influence in the short term. Nevertheless, economic policy can play a role here.

Over the medium term, public-sector investment and bet-

ter conditions for private investment, in particular, can

contribute to strengthening Germany’s growth potential

while reducing the current account surplus at the same

time. The Federal Government has already taken important

steps towards strengthening investment activity and will

continue its efforts (cf. Section II.A). This also includes the

considerable financial relief for the Länder and the munici-

palities by means of which the Federal Government creates

additional scope for public-sector investment (cf. Item 31).

21. In its country report of 26 February 2016, the European Commission analyses Germany’s national economic policy and also assesses progress towards the implementation of the country-specific recommendations issued by the Coun- cil of the European Union for Germany on 14 July 2015 for the 2015 – 2016 period. Furthermore, it also appraises Ger- many on the basis of the 2016 Alert Mechanism Report and presents the findings of its in-depth review performed in the context of the procedure to prevent and correct macro- economic imbalances.

22. The Federal Government welcomes the fact that the European Commission streamlined the European Semester last year to further improve the coordination of economic and fiscal policy. One element of this streamlining is the greater focus of the National Reform Programmes on pol- icy measures that address the economic policy challenges and macroeconomic imbalances identified in the country reports.

23. The central challenges for German economic policy which the European Commission identified in its 2016 country report are to boost investment activity, increase labour force participation and strengthen competition par- ticularly in the services sector and in railway transport. In the following section, the Federal Government reports on current and planned measures to address these challenges.

In this connection, the Federal Government also details how it is implementing the country-specific recommenda- tions for 2015/2016 (cf. Box 1) and delivering on its com- mitment from the Action Programme 2015 under the Euro Plus Pact (cf. Box 3).

A. Strengthening investment, preserving the stability of public finances

24. Investment is key to securing long-term growth and employment potential and to continued survival in the face of global competition for the best ideas, products and talents. This is all the more true the greater the advances in technological change and the more difficult it becomes to permanently secure the skills base in an ageing society. The investment made in the coming years will also determine whether it proves possible to maintain a modern and effi- cient infrastructure and to make a success of the energy transition.

Investment strategy

25. The Federal Government will continue its comprehen- sive approach to strengthen investment and broaden it spe- cifically. Initial elements of the Federal Government’s

Box 1: 2015 country-specific recommendations of the Council of the European Union for Germany The Council of the European Union recommends that Germany should take action in 2015 and 2016 to:

1. Further increase public investment in infrastructure, education and research. To foster private investment, take meas- ures to improve the efficiency of the tax system, in particular by reviewing the local trade tax and corporate taxation and by modernising the tax administration; use the ongoing review to improve the design of fiscal relations between the Federation, Länder and municipalities, particularly with a view to ensuring adequate public investment at all levels of government.

2. Increase incentives for later retirement. Take measures to reduce high labour taxes and social security contributions, especially for low-wage earners, and address the impact of fiscal drag. Revise the fiscal treatment of mini-jobs to facili- tate the transition to other forms of employment.

3. Take more ambitious measures to stimulate competition in the services sector, in particular in professional services,

by eliminating unjustified restrictions such as legal form and shareholding requirements and fixed tariffs. To this end,

conclude the ongoing domestic review of these barriers and take follow-up measures. Remove the remaining barriers to

competition in the railway markets, in particular in long-distance rail passenger transport.

investment strategy were presented in the Annual Economic Report. In the strategy, the Federal Government considers the main proposals of the expert commission tasked with

“strengthening investment in Germany” and will imple- ment these proposals in this legislative term. The Federal Government aims to raise the macroeconomic investment ratio to above the OECD average.

The Federal Government is planning and examining the following measures, inter alia, to strengthen investment activity in Germany on a lasting basis:

X

XReform of the administration of federal trunk roads:

To boost the efficiency of investments in infrastructure, the Federal Government is planning to set up a trans- port infrastructure company as part of the reform of the administration of federal trunk roads. This company is to be responsible for activities associated with planning, construction, maintenance, operation and financing, and operate in accordance with business management criteria. Work on the design concept of the transport infrastructure company is still ongoing. A reform of con- tract management in the field of federal trunk roads requires an agreement between the Federation and the Länder.

X

XContinued development of the promotion of invest- ment in municipal infrastructures: In order to further

strengthen the competitiveness of the structurally weak regions, the Federal Government will work with the Länder to consider how the funding of infrastructure can be improved in the context of the Joint Task for the

“Improvement of the Regional Economic Structure”.

Here, the Federal Government will also consider the requirements for the nationwide funding system for structurally weak areas post-2020, which still needs to be developed.

X

XEstablishing a comprehensive set of advisory and sup- port services for investment projects undertaken by the municipalities: To ensure high-quality municipal

infrastructure, the funding available for investment projects must be used as effectively and economically as possible. The large number and varying nature of municipal construction projects necessitates administra- tive skills and capacities which are not adequately avail- able in-house to all municipalities. It therefore makes sense to bring together the requisite capacities and skills on an overarching basis and to make them available to municipal administrations as needed. To this end, the

Federal Government will restructure and strategically realign the public-private partnership advisory com- pany, ÖPP Deutschland AG, by the end of the year. The new company is to offer the public sector – and particu- larly the municipalities – nationwide advisory services, irrespective of the selected procurement method. By bringing together specialist skills and competencies, the aim is to support the municipalities, where needed, in planning and carrying out investment projects so they can be implemented in the most economical way.

X

XExamination of fund models for private-sector infra- structure financing: The public sector believes that the

private-sector financing of infrastructure projects can offer advantages if it proves possible to manage the pro- ject risks better and to steer investment projects more efficiently, particularly by pooling projects and by stand- ardising project structures and contracts. The Federal Government is currently examining whether and, if appropriate, which legal and institutional conditions need to be adapted in order to mobilise additional pri- vate-sector infrastructure financing.

X

XImproving the general environment for private-sector investment: 90 % of all investment in Germany is pri-

vate investment. This is why, during this parliament, the Federal Government has already undertaken a large number of measures designed to create an attractive investment environment and will press ahead with other measures (cf. Item 36 and Item 42).

X

XBetter rules for young companies and venture capital:

Young companies make an important contribution to German industry’s competitiveness and capacity for inno- vation. The Federal Government continued to develop Germany as an internationally competitive base for ven- ture capital funding in 2015 (cf. Item 37 and Item 47) and – as announced in the document containing key points on venture capital – it will continue this strategy.

The Federal Government will take decisions on the details of its investment strategy in the first half of 2016.

Strengthening public-sector investment in infrastructure, education and research

26. In its country-specific recommendations, the Council of

the European Union recommended Germany to further

increase public investment in infrastructure, education and

research in the period from 2015 to 2016. In this legislative term, the Federal Government has taken far-reaching deci- sions in order to strengthen public-sector investment. The proportion of spending on investment rose from 8.5 % of the federal budget in 2014 to 9.5 % last year (cf. Table I, Nos. 1 and 2). Clear priorities continue to be set in the 2016 federal budget and investment in infrastructure, education and research is expanded (cf. Table I, No. 3). Since almost two-thirds of public-sector investment in Germany is undertaken by the Länder and municipalities, Germany aims investment at all levels of government (cf. Item 31).

Despite new challenges, particularly in connection with addressing the influx of refugees, the Federal Government remains committed to implementing the planned invest- ment projects.

27. The Federal Government increased investment in the transport infrastructure in 2015 and will continue this pro- cess. In the federal budget, €12.3 billion is earmarked for investment in transport for the current year; this is to rise to around €13.4 billion by 2018. The focus basically remains on maintaining the existing transport infrastructure.

Upgrades and new construction projects are being concen- trated on supra-regional projects and high-performance main axes which are particularly economic and of great significance for transport.

28. Further to this, the Federal Government has created the legal framework for realising the necessary development of an infrastructure for recharging electric vehicles (cf. Item 48).

29. In addition, the Federal Government has set up a Major Projects Action Plan to increase full-cost accounting, cost transparency, efficiency and on-schedule delivery of large- scale building and civil engineering projects (cf. Table I, No. 4). This plan formulates, inter alia, the following recom- mendations for planning and implementing major projects:

X

X

Strict application of a modern risk management system

X

Clear process and accountability structures

X

High degree of transparency towards the public

X

Team-oriented, collaborative partnership

X

Systematic use of digital, model-oriented planning methods

30. The Federal Government’s Digital Agenda (cf. Item 103) aims to have a nationwide broadband infrastructure in place in Germany with a download speed of at least 50 Mbps by 2018. In view of the pace of technological progress and the rise in demand overall, this can only represent an interim stage. The broadband roll-out is primarily the task of the telecommunications firms. In the context of the Digital Germany Network Alliance, the telecommunications firms actively work towards delivery of the Federal Government’s broadband goal. To this end, the telecommunications firms in the Network Alliance invested €8 billion in the networks in 2015 and have pledged to invest the same amount in 2016. For the future, the expansion of optical fibre must be continued resolutely in order to enable internet access with bandwidth in the gigabit per second range. Via the Guide- lines for Broadband Funding, the Federal Government is providing a total of €2.1 billion to fund the expansion of broadband. This will be topped up by the Länder with roughly €665 million from their share of the “Digital Divi- dend II” (cf. Table I, No. 5). The funding programme spon- sors the development of high-speed broadband networks in areas in which market-based expansion with a bandwidth of at least 50 megabit per second would not take place on the medium term. Complementing this, the Länder have introduced their own measures to support broadband development (cf. Table I, No. 6). The Federal Government has also launched draft legislation to facilitate the efficient expansion of digital high-speed networks (cf. Table I, No. 7).

With these measures, Germany is already paving the way towards a gigabit society.

31. The bulk of public-sector investment in Germany is undertaken by the Länder and the municipalities. For this reason, the Federation is providing considerable financial relief to these levels of government to enable them to finance their future-oriented projects on a sustainable basis. In the fields of childcare, schools and third-level edu- cation, the Federation is providing additional relief total- ling €6 billion to the Länder and municipalities in the cur- rent legislative term. In particular, the Federation is covering the entire cost of monetary allowances under the Act to Amend the Federal Educational Assistance Act (Bundesaus­

bildungsförderungsgesetz, BAföG), thereby giving the Länder annual relief of €1.17 billion on a permanent basis. Added to this, the Federal Government is granting further pay- ments for childcare and the expansion of kindergartens.

Through the Higher Education Pact, the Federation contin-

ues to help create study places for up to 760,000 additional

new students at higher education facilities compared with

34. The overall fiscal situation of the Länder and the munici- palities has developed positively in recent years. To a signif- icant extent, this has been helped by the substantial relief provided by the Federal Government (cf. Item 31 and Over- view 2).

35. In addition to providing considerable funds for the housing and care of refugees, the Federal Government is also supporting the Länder and the municipalities by authorising the Institute for Federal Real Estate to allow the Länder and municipalities to use federal properties rent-free for the purpose of accommodating refugees and to reimburse them for appropriate fitting-out costs. Since 2015, the Institute has been authorised to sell sites which were previously used by the military to municipal pur- chasers at a reduced price. The Institute has been author- ised to provide further plots of land at a reduced price for the purposes of social housing. The medium-term budget- ary planning also envisages substantial structural and dynamic relief. In this way also, the Federal Government is helping to ensure that the originally planned municipal investment projects can still be realised despite the addi- tional costs arising from the refugee influx.

Boosting the efficiency of the tax system to promote private investment

36. As a main starting point to foster private investment, the Council of the European Union has recommended that Germany should take action to improve the efficiency of the tax system (cf. Box 1). In particular, the local trade tax and corporate taxation should be reviewed and the system of tax administration modernised. The country report also addresses these recommendations. However, in assessing the complexity of corporate taxation in Germany, the report does not adequately appreciate the findings of the World Bank study used. For the fictitious sample company examined in the study, the time associated with the pay- ment of taxes only amounted to 84 hours and – contrary to the situation presented by the European Commission – was therefore below the EU average.

37. Overall, German tax law is modern and competitive. Its continued development makes an important contribution towards maintaining Germany’s economic strength. One focus of the continued development of German tax law is to further improve the conditions for private investment.

To provide incentives for medium-sized businesses, in par- ticular, to improve their equity base the Federal Govern- the capacity available in 2005 (cf. Table I, No. 8). The Länder

and municipalities, which account for the majority of pub- lic-sector expenditure on education, have also continu- ously increased spending in this area (cf. Table I, No. 9).

An additional €3 billion is earmarked for research. This is mainly allocated to the Initiative for Excellence and the Pact for Research and Innovation (cf. Table I, Nos. 10 and 11). The Federation is solely responsible for funding the extra three percent for scientific organisations from 2016 to 2020, as set down in the Pact.

In addition, considerable funding for investment in infra- structure is also being provided to the Länder and munici- palities (cf. Table I, No. 12). Furthermore, the Federation is also supporting the Länder with over €6 billion for 2015 and 2016 to help them house and care for refugees and asylum seekers. These and further relief measures are described in Overview 2. According to this listing, the total relief granted in the 2013 – 2018 period exceeds €45 billion.

Sound fiscal policy creates scope for action

32. Sound government finances are a fundamental prereq- uisite for the Federal Government’s pro-growth and pro-investment economic and fiscal policy. The ‘debt brake’, which is enshrined in the German Basic Law, leaves sufficient scope to avoid having to change investment plans if steps are necessary to respond to unexpected short- falls on the revenue side. Therefore, strengthening invest- ments and maintaining Germany’s debt rules are not mutually exclusive aims.

33. In 2015, the German state budget achieved a surplus of 0.7 % of GDP. Despite the additional public-sector spending due to the large number of refugees, the Federal Govern- ment is continuing its intergenerationally fair pro-growth policy. In 2015, the overall public-sector debt-to-GDP ratio fell by 3.5 percentage points to 71.2 % of GDP. This year, it will drop below 70 %, and in so doing means that the Fed- eral Government will meet a central goal of the German Action Programme for the Euro Plus Pact (cf. Box 3).

Nevertheless, given the considerable, hard-to-forecast addi-

tional spending on the reception and housing of asylum

seekers, Germany requires a vigilant and predictive fiscal

policy, and a high degree of expenditure restraint, to ensure

the state has the full ability to act in the future and in

unexpected circumstances.

Overview 2: Selected Federation measures to relieve the Länder and municipalities since 2013

* The financial impact of specific measures was assessed at the time of the entry into force of the respective measures. It is not possible to provide information about the actual financial relief provided.

Year of entry

into force Measures Explanations*

2013 Reconstruction aid fund for flood damage Federal Government contribution of approx. €3 billion to the flooding aid fund

2013/2015 Expansion of daycare for children under three - Investment costs: €580.5 million from 2013 and €550 million total in 2016 – 2018

- Help with operating costs: extra €18.75m in 2013, €37.5m in 2014 and €75m p. a. from 2015 (i. e. total for operating costs: €845m p. a.) plus €100m p. a. in 2017 and 2018 (i. e. then €945m p. a.).

2014 Revision of the Act Unbundling Joint Tasks and Financial Aid €2.6bn p. a. in 2014 – 2019;

Continuation of the compensatory payments at the existing level pursuant to Article 143c of the Basic Law

Support with challenges due to immigration from EU Member States

€200m e. g. for urban development, advice, care, integration

2015 Full assumption of benefits under the Federal Educational Assistance Act

€1.2bn p. a. unlimited in time

Reform of the Asylum Seeker Benefits Act €31m in 2015 and €43m p. a. from 2016 Act for Further Relief for Länder and Municipalities

as of 2015

€1bn p. a. in 2015 – 2017 (half for each via costs of accommodation and municipal share of VAT) Act to Promote Investment by Municipalities with

Inadequate Financial Resources and to Help Länder and Municipalities Finance the Reception and Accommodation of Asylum Seekers

- Financial assistance via Municipal Investment Promotion Fund: €3.5bn total in 2015 – 2018

- €1bn via increased municipal share of VAT and €500m via increased federal share of accommodation costs in 2017 2015/2016 Help with reception and accommodation of asylum seekers:

lump sum assistance for 2015. From 2016 structural, permanent and dynamic participation of Federation in public-sector costs depending on the number of incoming asylum seekers and refugees.

- €2bn in 2015 via increase in VAT share of Länder

- €3bn advance payment for 2016 (at end 2016 also an exact tally, taken into account for the 2017 advance payment.

The payments for 2017 ff. depend largely on the duration of asylum procedures and the number of asylum seekers.

- €0.35bn p.a. from 2016 for unaccompanied minor refugees - €2bn in total in 2016 – 2018 for improvement in childcare 2016 Increase in the unbundling funds to promote housing in the

context of the Act to Expedite Asylum Procedures

€500m p. a. in 2016 – 2019

Increase in regionalisation funding Increase by €600m in 2016 to €8bn; from 2017 – 2031 rising by 1.8 % p. a.

Revision of the Housing Benefits Act adapting housing bene- fit to the development in the cost of housing including ancil- lary costs since the last adjustment

Approx. €80m p. a. for further relief for municipalities in the basic security benefits for jobseekers and cost of living assistance

2018 Relief for municipalities in the context of the envisaged adoption of the Federal Participation Law

€5bn p. a. from 2018

Further measures to strengthen private investmentn 42. Beyond taxation policy (cf. Item 36 ff.), the Federal Gov- ernment has initiated extensive measures to improve con- ditions for private investment.

43. In order to give companies greater scope in which to act, the Federal Government is continuing to reduce red tape. Since 2014, the Federal Government has been imple- menting its own “Better Regulation” programme of work with many individual initiatives for the business commu- nity and administration, but also with a focus on the needs of the public. The biggest improvements for business in 2015 come from two pieces of legislation, in particular: the Act to Reduce Bureaucracy (Bürokratieentlastungsgesetz), which is lowering the burden by around €700 million, and the modernisation of procurement law, which is lessening the cost of red tape by more than a billion euros (cf. Table I, Nos. 15, 16, 17 and 18). Overall, the compliance costs for business in 2015 were reduced on balance – i. e. taking the overall view of increases and reductions in burdens con- tained in all Federal Government legislation in that period – by approximately €1.4 billion. The Bureaucracy Cost Index dropped below its initial 2012 level of 100 for the first time last year, and ended 2015 at 99.1.

44. On 1 January 2015, the Federal Government introduced a new brake on bureaucracy in the form of a “one in, one out” principle - as also agreed in the German Action Pro- gramme 2015 for the Euro Plus Pact (cf. Box 3). This approach is based on the concept that any new regulations affecting businesses have to be offset by a reduction of the same amount of bureaucracy (cf. Table I, No. 19).

45. Furthermore, the Federal Government also examined how businesses and individuals perceive contact with the authorities. The results of this study conducted by the Fed- eral Statistical Office provide information on how satisfied the parties surveyed are in selected situations, such as how helpful an authority appears to be, or whether sufficient information is available about the procedural steps. One aspect is also people’s experience with digital local author- ity services. The growth of online local authority services is also a central priority in the further implementation of the

“Digital Administration 2020” government programme.

The results of the survey conducted by the Federal Statisti- cal Office also constitute an important incentive for a sec- ond programme for better regulation in the current legisla- tive term, which is currently under discussion. The aim is to further improve legislation clarity, to push ahead with ment is, for example, reviewing the rules on retained prof-

its in the Income Tax Act (Einkommensteuergesetz). With regard to tax conditions, Germany will also become a more competitive base for venture capital funding (cf. Item 47).

No action needs to be taken with regard to the taxation of life insurance contracts: for preferential tax treatment no distinction is made whether the contract is a traditional or unit-linked product. This also applies to the Riester pension system.

38. The trade tax is the most important original source of revenue for the municipalities in Germany. Through an apportionment system, the Federation and the Länder share in the trade tax. Trade tax secures the financing of municipal-level responsibilities in Germany. Reforms to the trade tax strike at the core of the Federation/Länder financial relations and can only be achieved with the con- sensus of all parties involved. No changes to the trade tax are planned in the current legislative term.

39. The Länder will continue their efforts to reform land tax in the near future whilst retaining the right for municipali- ties to set the municipal multiplier. The Federation will continue to support these reform efforts.

40. An efficient taxation system must also ensure that no-one can avoid his obligation to pay taxes at the expense of society in general. The fight against the shifting of prof- its across borders by companies which operate internation- ally is a central objective of taxation policy in the current legislative term. The Federal Government therefore fully advocates the global implementation of the recommenda- tions drawn up by the OECD on behalf of the G20 to tackle base erosion and profit shifting (BEPS, cf. Table I, No. 13).

41. Digitisation opens up new possibilities to make the tax- ation procedure more efficient. Working together with the Länder, the Federal Government aims to keep modernising the tax collection processes. This includes the expansion and further development of IT support, a more service- oriented fiscal administration, and structural procedural changes. The legal conditions for this are created by the Act Modernising the Taxation System (Gesetz zur Moderni­

sierung des Besteuerungsverfahrens), which is to enter into

force on 1 January 2017. The envisaged technical and

organisational measures are to be gradually implemented

by 2022 (cf. Table I, No. 14).

this basis. With the Federal Government as moderator, the industry is developing a common, cross-provider proce- dure for recharging and billing the electricity delivered to electric vehicles. At the initiative and with the financial support of the Federation, service stations on federal motorways are already being fitted out with quick recharg- ing points for electric vehicles.

Making the energy transition investor-friendly, increasing cost efficiency

49. The energy transition is one of the Federal Govern- ment’s key projects. The aim is to achieve an environmen- tally compatible and affordable energy supply whilst main- taining competitiveness and security of supply. The energy transition not only makes it possible to phase out nuclear power by the end of 2022, but also helps Germany to attain its climate targets. An efficient and sparing use of energy and an ongoing expansion of renewable energy are the two fundamental strategies for pressing ahead with the energy transition. Considerable investment is needed if the energy transition in Germany is to be an environmental and eco- nomic success. For this, the stakeholders need certainty for planning and investment, the fields of action in the energy transition need to be dovetailed more closely, and the measures designed need to be cost-efficient and acceptable to the public.

50. The Renewable Energy Sources Act (Erneuerbare­Ener­

gien­Gesetz (EEG)), which was reformed in 2014, placed the funding of renewable energy on a viable basis: The expan- sion is taking place in a manner which is better suited to helping stakeholders plan and to keeping costs down than before. From 2017, the funding rates for renewable energy are generally to be determined by auction (cf. Table I, No. 29).

The specific auction models for the various renewable energy technologies are to be stipulated this year in a fur- ther revision of the Renewable Energy Sources Act. The Federal Government’s aim is that the auctions should cre- ate more competition and ensure that the cheapest projects using the specific technology will be rolled out. The new funding system is to guarantee a broad diversity of stake- holders and ensure that the deployment corridor for renew- able energy is adhered to. At the same time, the Federal Government is keeping an eye on the costs of the overall system. With a view to allowing operators of new installa- tions in other European countries to participate in auctions, the pilot auctions for ground-mounted photovoltaic instal- lations are also to be opened up for electricity from other the continued expansion of e-Government and deliver

additional relief for businesses.

46. Single points of contact are provided in the EU Member States to ensure that new start-ups can be realised as easily and as online as possible, also on a cross-border basis. They offer a one-stop shop with access to all information and procedures needed for an engagement in commercial activity. With the “Single Point of Contact 2.0” project, the aim is to improve the service portfolio in future, make it more user-friendly and as digitised as possible (cf. Table I, No. 20).

47. With a view to facilitating access to venture capital for innovative start-ups, the Federal Government adopted measures in September 2015 to improve the policy envi- ronment for venture capital and start-ups in Germany (cf.

Table I, Nos. 21, 22, 23, 24, 25, 26 and 27). For example, these measures envisage an expansion of the INVEST grant pro- gramme this year and an extension of the potential ben- eficiaries to include fund investors. Also, the taxes on capi- tal gains and losses are to be reimbursed pro rata. Overall, public funding totalling about €2 billion is available for new venture capital investments.

48. The continued development of electric mobility is an important factor both with regard to achieving our climate change mitigation targets and for the future of the German automotive industry. As a basis for ensuring that Germany can secure and expand its position as the leading provider and leading market for electric mobility, the Federal Gov- ernment in tandem with the automotive industry is devel- oping an operational framework for the continued promo- tion of electric mobility.

The development of the necessary recharging infrastruc- ture is of central importance for the increased market pen- etration of electric vehicles. In the course of implementing the EU Directive on the Deployment of Alternative Fuels Infrastructure, the Federal Government is developing a national strategic framework for the development of a nationwide recharging infrastructure for electric mobility.

The Ordinance on Technical Minimum Requirements for the Deployment and Operation of Publicly Accessible Charging Stations for Electric Vehicles (Verordnung über technische Mindestanforderungen an den Aufbau und den Betrieb von öffentlich zugänglichen Ladepunkten für Elektro­

mobile) entered into force at the beginning of 2016 (cf.

Table I, No. 28). A needs-oriented infrastructure for the

recharging of electric vehicles can now be developed on

ject of public consultations and then decided. In autumn 2016, the 2025 grid development plan and the 2025 off- shore grid development plan are to be confirmed. The tim- ing of grid development plan processes often overlap. Fol- lowing a change to the law which entered into force on 1 January 2016, the processes will start every two years instead of every year as was previously the case. In the intermediate years, the transmission system operators will create reports on progress regarding the implementation of the measures.

55. Greater investment in distribution grids will also be required in the coming years. The revision of the Incentive Regulation Ordinance (Anreizregulierungsverordnung), which is slated for 2016, is to make the regulatory frame- work for grid expansion more investment-friendly (cf.

Table I, No. 34). The Act on the Digitisation of the Energy Transition (Gesetz zur Digitalisierung der Energiewende) is intended to permit the legal basis to be put in place for a broad use of digital innovations in the energy sector (cf. Table I, No. 35).

56. Extensive investment in boosting energy efficiency in addition to increased investment in the energy infrastruc- ture is needed if we are to deliver on the goals of the energy transition. With the National Action Plan on Energy Effi- ciency, the Federal Government rolled out numerous meas- ures to strengthen energy efficiency and attain climate targets (cf. Item 111). In order to finance measures of an additional energy efficiency package, the funding in the Energy and Climate Fund is to be topped up by a total of up to €5.8 billion in the years to 2020 (cf. Table I, No. 36).

Restructuring fiscal relations between the Federal and Länder governments

57. In its country-specific recommendations, the Council of the European Union recommended that Germany should use the ongoing review to improve the design of fiscal rela- tions between the Federation, Länder and municipalities, particularly with a view to ensuring adequate public invest- ment at all levels of government (cf. Box 1).

58. At the end of 2019, the rules on fiscal equalisation in Germany – the Standards Act (Maßstäbegesetz) and the Financial Equalisation Act (Finanzausgleichsgesetz) – will cease to apply. This also means that the rules on the distri- bution of the funding from Solidarity Pact II will expire. It is therefore necessary to restructure federal-Länder fiscal EU Member States in 2016 (cf. Table I, No. 30). Based on the

experience from the pilot, auctions are also to be opened up to other technologies to a certain degree from 2017.

51. In order to guarantee security of supply even in the face of rising shares of renewables-based electricity, the Federal Government is further developing the electricity market in the form of the Electricity Market Act (Strommarktgesetz), (cf. Table I, No. 31). The draft legislation is based on a strictly market-based regulatory framework and more solid rules which investors can rely on. It aims to strengthen existing market mechanisms, activate flexibility options and improve the European integration of the electricity market.

In unforeseeable exceptional situations, a capacity reserve is to safeguard the supply of electricity (cf. Table I, No. 32).

52. The Federal Government has put the policies in place for expanding the grid more quickly and gaining more public acceptance for it. For new “electrical super high- ways” (extra-high voltage, direct current (EHV-DC) trans- mission lines), federal planning has awarded precedence to underground cabling since 31 December 2015. Where peo- ple live, overhead DC lines will not be permitted. In other areas, overhead lines will only be possible in certain excep- tional cases. For new alternating current transmission lines, for which it is technically more difficult to use under- ground cables, the criteria and the number of pilot projects for sections of underground cabling have been expanded (cf. Table I, No. 33).

53. The implementation of the new precedence to under- ground cabling for EHV-DC transmission lines will require the planning of these power lines to be reviewed. However, as there is likely to be far greater public acceptance of underground cabling than of overhead lines, it can be expected that the projects will be implemented more quickly overall. A faster expansion of the grid will reduce grid congestion in Germany and at the border to neigh- bouring countries and lower the costs for grid congestion management. In light of this, any additional costs deriving from underground cabling appear to be justified.

54. The requirement plans pursuant to the Federal Require- ments Plan Act (Bundesbedarfsplangesetz) and the Power Grid Expansion Act (Energieleitungsausbaugesetz), which also concern cross-border interconnector projects, have been adapted on the basis of the 2024 grid development plan. These prescribe the grid projects needed by the energy industry and their binding starting and end points.

The specific route of the grid will subsequently be the sub-

jobs requiring compulsory social security contributions is developing even more dynamically than gainful employ- ment, increasing in June 2015 by 2 % compared with the same month of the previous year.

Last year, real gross wages and salaries per employee recorded the highest increase, of over 2.5 %, for more than two decades; not least, this is due to the minimum wage. In view of the considerable degree of price stability, this means tangible real increases in wages.

Under the principle of collective bargaining autonomy, which is enshrined in the constitution, wage formation is the re spon sibility of the parties to collective bargaining. The parties must consider the competitive situation of the busi- ness enterprises and the interests of the workers to negoti- ate wages that factor in the particular circumstances in the individual sectors. While average values at the macroeco- nomic or international level can provide useful pointers, they are not an adequate basis for concrete wage deals. There- fore, in the Federal Government’s opinion, the far-reaching conclusions for wage policy drawn by the European Com- mission on the basis of average values and a reference year selected at random are not sufficiently founded and could also be interpreted as an attempt to influence autonomy in collective bargaining.

Further increasing labour force participation, creating incentives for later retirement

61. The positive development in labour force participation can particularly be seen amongst older workers. The employ- ment rate of the 55 – 64 age group rose from 45.5 % in 2005 to 65.6 % in 2014. This places the proportion approximately 14 percentage points above the European average. This devel- opment clearly illustrates that there are effective incentives in Germany for later retirement and that, in light of demo- graphic change, more and more business enterprises are endeavouring to employ older workers for longer. The rais- ing of the general retirement age to 67 and the higher age limits for early old-age pensions are having an effect. They help secure the labour and skills base and safeguard the sta- bility of the pension insurance system. The development in female employment is also positive. Standing at 73.1 %, the relations in general. Negotiations on this matter are still

ongoing. The Federal Government would like to arrive at a result together with the Länder during this legislative term which meets the interests of the Federation and the Länder.

In restructuring federal fiscal relations, the aim is to mod- ernise both the vertical fiscal relations between the Federa- tion and the Länder, and the horizontal fiscal relations among the Länder themselves. As already explained (cf.

Item 31), the Federal Government is relieving the burden on the Länder and municipalities so that they can better meet their responsibilities in the fields of childcare, schools and third-level education, immigration and infrastructure.

B. Increasing labour force participation, integrating refugees as well as possible

59. Last year, more people were in gainful employment than ever before in the history of the Federal Republic. The high level of employment is making a major contribution towards material prosperity in Germany and is also a foun- dation for a high level of social equity. However, demo- graphic change and the current high refugee influx are confronting all levels of government with major chal- lenges. In order to secure the skills base and strengthen social cohesion, the priority must now be to support the positive development in employment figures by further increasing labour force participation and via the rapid integration of refugees. Further to this, in light of the rise in the influx of refugees last year, the Federal Government is actively seeking orderly and controlled refugee immigra- tion and an appreciable and lasting reduction in the num- bers of refugees. As the refugee situation concerns all of Europe, all European countries must shoulder the respon- sibility.

60. With more than 43 million people in gainful employment on average last year, the trend towards higher employment in Germany is continuing. The number of gainfully active persons is 3.7 million higher than in 2005. The employment rate for 20 – 64 year-olds also reached a new record high in 2014, at 77.7 % compared with 69.4 % in 2005. Overall, Ger- many has now joined Sweden as a country with the highest proportion of people in work in the EU. Employment in

3 The number of people in jobs subject to social security contributions is determined on the basis of the registrations for social security per month with a waiting period of six months. Due to the submission deadlines and the flow of registrations, it is only possible to obtain stable statistic results from employment statistics after this six-month period. The value for June is a good indicator of the annual average and is therefore used as the annual value.