According to a recent report by the International Monetary Fund (IMF), Germany needs around €220 billion in adjustments – savings or additional revenue – by 2035 to stabilize its public debt, which is considered to be achievable primarily by restructuring the pension system, reducing subsidies and targeted tax increases, Handelsblatt reported, as cited by Hungarian portal Portfolio.
IMF analysis shows that the pressure on the German budget will increase drastically over the next decade.
The primary factors behind the increase include an aging of society, with estimates stating that pensions and healthcare could cost nearly €100 billion more per year by 2035; a jump in defense spending, expected to be €22 billion per year; and a higher cost of borrowing, with interest payments on public debt expected to increase by around €18 billion euros, according to the IMF forecast.
Unfortunately, the IMF writes, spending cuts are not enough. Experts are calling for future pension increases to be decoupled from wage growth and tracked solely by inflation. This alone could result in savings of around 1 percent of GDP by 2040. The IMF also recommends reviewing the possibility of early, tax-free retirement and adjusting the retirement age to life expectancy after 2031.
To improve labor market efficiency, the IMF report additionally calls for increasing the number of hours worked and reducing part-time employment. This would mandate expanding the child benefit system and reviewing the joint taxation of spouses. Eliminating environmentally harmful subsidies is also essential for fiscal consolidation.
Regarding taxes, proposals include closing the inheritance tax loopholes, especially tightening the generous exemptions for family businesses; raising property taxes and excise taxes on alcohol, which are low in Germany by international standards, as possible measures; and eliminating certain VAT exemptions for the hospitality industry, which the IMF says have had little impact on economic growth.
All in all, without a fiscal adjustment of about 5 percent of GDP, the IMF says Germany’s debt ratio could become unmanageable in the long term.
Notably, the IMF says nothing about increasing deportations or reducing immigration numbers, which is burdening Germany with approximately €50 billion in costs per year.
At the same time, the IMF strongly warns against further increases in personal income taxes and social security contributions, as any further increases would weaken the incentive to work. According to the IMF, in terms of expenditures, given any room to maneuver, it would suggest higher public spending and lower income taxes.
