National Reform Program. Germany. 15. August 2006

Transcription

1 National Reform Program Germany Implementation and progress report August 2006

2 Inhaltsverzeichnis 1. Overview Economic situation and overall economic framework Situation and perspectives of the German economy in the year Sustainable design of public finance - protecting social security Sustainable design of public finance Designing social security viably - reducing non-wage labour cost Sustainable reform of old-age security Reform of the health sector Completing German unity Reform of federalism - clear delineation of responsibilities Progress in structural change Expanding the knowledge economy Progress in research, innovation and state-of-the-art technology Strengthening educational systems Opening up markets and increasing competitiveness Progress in and shaping competition Focussing on growth-orientated markets Strengthening industry s competitiveness Strengthening the framework for entrepreneurial activity Clearing ground for private initiative Building up Germany as a financial platform Improving Corporate Governance Supporting young and small enterprises Shaping taxes in a growth-orientated manner Expanding the infrastructure Long-term energy policy Using ecological innovations as a competitive advantage Preparing the labour market for future challenges Shaping structural labour market reforms efficiently Activation and prevention Effective integration as a guiding principle Enhancing flexibility and employability on the labour market Modern immigration policy Active integration into the labour market Life cycle-oriented approach Aligning labour market policy with demographic change Integrating young people into the labour market Raising the share of women in the labour force Promoting employment among older workers Restructuring support for start-up businesses by former unemployed persons Improving the work-life balance Creating a better framework for mothers and fathers Enhancing the availability of all-day child care Promoting family-friendly HR policies Initiative Local Alliances for Families Tabelle: Maßnahmen und deren Stand der Umsetzung im Rahmen des Nationalen Reformprogramms Strukturindikatoren für Deutschland im Jahr

3 1. Overview 1. With the present implementation and progress report, the Federal Government will inform the European Union, the legislative bodies in Germany as well as the European and German public about important projects which have been initiated since the presentation of the 2005 National Reform Programme (NRP) and have partly been implemented through proper legislation in the meantime. This report adds some details and concrete terms to the 2005 NRP which was established last year during the transitory stage of government formation. 2. In the 2005 NRP, the Federal Government defined six priorities for the timeframe 2005 to One key issue will be the further development of the knowledge society as a central condition of the viability of modern societies, of participation and social justice. Other priorities include the competitive design of the markets and further improvement of the overall conditions of entrepreneurial activity through a reduction of impediments to private initiative, strengthening a competitive business structure and supporting small and medium-sized enterprises. In line with the triad consisting of renew - reform - investment that characterises policies in the current parliamentary term, the Federal Government attributes primary importance to the sustainable consolidation of public finance, safeguarding economic stability and preserving social security. The use of ecological innovation is to be enhanced, after all, it combines the protection of the environment with long-term cost savings and increased effectiveness. However, the orientation of the economic, financial and labour market policy towards higher employment continues to be the core priority. The Federal Government welcomes the focus placed by the European Council in March The six priorities in the 2005 NRP largely cover the four fields of action which had been identified as areas of priority by the Council of the European Communities in March 2006: (i) higher investment in knowledge and innovation (section 3.1), (ii) unlocking business potential, especially in small and medium-sized enterprises (sections 3.2 and 3.3), (iii) increasing employment opportunities (section 4), and (iv) an energy policy for Europe (sections and 3.4). Thus, the essence of the German reform policies for growth and employment is fully in line with the European strategy. The comment of the European Commission concerning the German NRP that is contained in the 2006 spring report will be dealt with in the corresponding sections of the present implementation and progress report. 3. In the 2005 NRP, the Federal Government concentrates on central fields of action that have to be pursued in order to achieve growth and employment in a globalised environment in view of the demographic change of society and the transition towards the service and knowledge society. The national agenda of reforms is designed to strengthen the forces of growth through higher employment rates, higher investments and greater dynamics of productivity. The agenda for economic recovery in east Germany still enjoys great priority in the Federal Government. Although the concrete measures have been tailored to the specific national conditions, Germany nevertheless also makes a significant contribution towards the Lisbon strategy of the European Union. Since the introduction of the Euro, important framework data for economic development have no longer been determined at the purely national level, but to an increasing extent by the other Member States and the European level. Favourable overall economic conditions are a decisive factor for drawing full benefits for growth and employment from the structural reforms, and for actually utilising the increased production potential. This refers not only to the 3

4 smooth cooperation of the macroeconomic policy fields, but also to their interaction with the structural reforms on the markets for goods, services, and employment. Conversely, successful structural reforms will increase the efficiency of macroeconomic impulses in all markets, thus strengthening their resistance to external interference. For this reason, a growth- and stability-oriented policy in all countries, in particular, the Euro zone, is of vital importance for the economic dynamics within the Community. 4. Restoring a sound financial basis is of key importance at the overall economic level (cf. section 2.2.1). This is designed to comply with the objectives of the Growth and Stability Pact and the deficit limits defined in Article 115 of the Basic Law. In combination with the other reform measures, long-term viability of public finance will contribute to a further consolidation of the confidence of investors and consumers into a sustainable economic policy. 5. As regards budget consolidation, progress is primarily based on cuts in spending and the reduction of tax benefits and special tax exemptions - which can be considered equivalent to reduced spending. Important measures for reducing subsidies and special tax exemptions have been implemented, such as the abolition of the homeowner s tax subsidy. Nevertheless, increasing the value-added tax rate is absolutely necessary. This increase not only contributes to a budget consolidation, it also ensures that the labour cost in Germany can be reduced. In order to additionally create short-term impulses for investment and sustainable, stronger economic dynamics, the Federal Government adopted a 25 billion Euro growth programme in early The federal states and the communities have committed another approx. 12 billion Euro. The course for a sustainable reform of the system of old-age pensions has been basically set by the pension reforms implemented in the previous years and the establishment of a funded provision for old age. The gradual increase of the pensionable age to 67 years that was adopted by the government is an important contribution towards the protection of the pension funds, and thus the sustainability of public finance in view of the demographic change (cf. section 2.2.3). 6. Germany has a modern, efficient health service which offers all citizens access to highquality health care while securing some 4 million jobs. In view of great challenges, not least due to the demographic change and the technical and medical progress, the health sector must continuously be further developed. However, reforms will have to account for the discrepancy between the requirements of a dynamic, innovative growth industry and the necessary control of spending. Therefore, the reform of the health system is one of the most important projects with respect to demographic developments and the stressbearing capability of the social security systems. For this purpose, a draft legislation will be prepared in autumn 2006 which will not only include provisions to safeguard sustainable financing, combined with a relaxation of the dependency of financing on labour, but also promote economic efficiency and competition in the health sector (cf. section 2.2.4). 7. One fundamental element of the joint process of renewal pursued by the Federal Government and the federal states is the reform of the system of federalism in the Federal Republic of Germany (cf. section 2.4). The fundamental reform of the structures of federalism will improve the transparency and efficiency of the distribution of responsibility and decision-making bodies to the different federal levels. It will strengthen the benefits of federal structures and reduce their weaknesses. In particular, the capacity to act and implement reforms will be strengthened at all levels of government, accountabilities will be clearly defined, and many law-making processes will be accelerated. The reform is also designed to address the financial relations between the different federal levels in a second step. 4

5 8. Germany is a central location for research and development with a high level of knowledge and education. The German economy lives on its technological products and innovative services. Therefore, promoting the knowledge society is one focus of the six priorities defined by the Federal Government in the 2005 NRP. One important factor for the transition towards a knowledge- and technology-based economy is - in addition to promoting research and development - the qualification level of the German workforce. Special emphasis is placed on the in-company system of vocational training. In the current parliamentary term, the Federal Government will invest an additional 6 billion Euro on research and development, thus contributing towards the achievement of the 3% objective. In order to accelerate the time between ideas and innovation, the Federal Government has set up a High Tech Strategy for combining the support of research and development and the design of framework conditions that are conducive to innovation into a homogeneous policy for innovation (cf. section 3.1). 9. The European single market is opening up great opportunities for growth and employment in Germany. Therefore, the Federal Government will actively contribute towards the promotion of all measures by which the single market is accomplished. This includes, for example, the complete liberalisation of the European market for postal services, the revision of the legal framework for telecommunications, the implementation of the action plan for financial services or the standardisation of the basis of assessment for corporate taxes (cf. section 3.2). As regards the opening of the network-bound markets, it is necessary, from the German point of view, to find the proper balance between competition of service providers and the diffusion of innovation. Infrastructure and networks must be opened wherever necessary to achieve more intense competition in favour of the clients. At the same time, incentives to invest in new infrastructure measures must be maintained in order to help new technologies to spread. In order to maintain its position in the competition between globalised markets, Germany must continue to firmly rely on growthoriented markets and fully exploit their potential. Industry continues to be the backbone of the German economy. The manufacturing sector is an important source of product and process innovation. At the same time, important elements of added value, i.e. profits and labour income, are derived from this sector. Flexibility and especially also mobility are fundamental requirements for an economic upswing. The mobility of humans, goods, and services is a prerequisite of economic growth and increased employment. Therefore, an efficient transportation infrastructure is of special importance. At the same time, transportation management and the transportation industry are among the innovative economic sectors in Germany. Growth-oriented markets as well as the competitiveness of industry are in the focus of industrial policy in Germany. 10. Growth presupposes creativity, vision and the capability of entrepreneurs to convert their ideas into products, processes and services on the market. To achieve growth, companies have to be founded and investments have to be made. For this reason, it is the aim of the Federal Government to create a favourable climate for entrepreneurial activity (cf. section 3.3). In order to achieve a positive business environment, government activities should be efficiently designed and bureaucratic impediments must be eliminated without neglecting workers interests or the protection of the environment and of consumers. Especially small and medium-sized enterprises benefit more than others from less bureaucracy. For this reason, important steps were initiated in the very first few months of the current parliamentary term in order to create a favourable economic environment for the medium-sized companies in trade, commerce, industry, the service sector and the professions. In addition to a law to reduce bureaucratic burdens on SMEs, the Federal Government has introduced the standard cost model and will establish a standards review com- 5

6 mittee to examine the cost of bureaucracy caused by existing and new regulations. Furthermore, the support of innovation and technology in small and medium-sized enterprises was improved and an SME initiative was launched which includes, without being limited to, measures to improve the financing conditions for small and medium-sized enterprises. Enterprises are also further relieved from company taxes. In order to remain internationally competitive, tax rates have to be reduced to attractive levels especially for corporations. For this reason, the corporate tax reform announced for the year 2008 is also one of the most important tasks of the Federal Government. The aim is a statutory tax rate of less than 30%. 11. A safe energy supply and competitive energy prices are key factors for the competitiveness of the German industry. Since the new energy industrylaw came into force in July 2005, the power and gas network operators have been subject to strong, efficient supervision by the Federal Network Agency and the regulatoryauthorities of the federal states. This will improve the competitive conditions and contribute to a better utilization of potential cost savings identified. In view of the worldwide rise in demand for raw materials, Germany will reduce import risks by relying on a balanced, diversified energy mix which also includes coal and an increasing share of renewable energies. Furthermore, Germany is striving to achieve ambitious efficiency gains both in the generation and conversion of energy and in energy demand. An efficient use of resources and opening up new markets will also contribute to Germany s competitiveness, in particular, as regards innovative energy technologies. In the second half of 2007, the Federal Government will present an overall energy strategywith a perspective until the year 2020 which will link reliability of supply, reasonable energy cost and efficient climate protection in an efficient way. In the course of its preparations, the Federal Government has initiated a process of discussion at the energy summit in early April 2006 which is designed to identify proposals concerning vital energy policy issues. 12. The modernisation of the labour market continues to be a major issue of the reform agenda in Germany (refer to section 4). By the four acts concerning modern services on the labour market, the contents and organisation of German labour market policy were completely reoriented in the years 2003 and The labour market reforms are beginning to take effect, which is demonstrated by the fact that the Federal Labour Agency is now achieving savings which will help to reduce the contribution level to the unemployment insurance. The core features of this reorientation include strengthening a preventive approach in labour market policy, establishing the principle of promoting and challenging, opening up new employment potentials through new instruments as well as a comprehensive organisational reform of the labour administration. In line with the European employment objectives, it is aimed at strengthening growth in Germany, supporting the exploitation of all employment potentials and also at improving the opportunities for unemployed people to find a job. The central leitmotif of these structural reforms is an activating, social state which calls for a new relationship between individual responsibility and solidarity in society. The years 2005 and 2006 have been characterised by the implementation of these reforms, especially as regards basic security for jobseekers (combination of unemployment assistance and social assistance for persons in need, yet fit for work). In Germany, labour market policy has undergone a process of scientific evaluation of reforms by independent institutions for the first time. Where a need for adjustment was identified, the Federal Government initiated appropriate measures. In summer 2006, the Federal Government already adopted changes to the labour market reforms ( Hartz IV ). They will improve the incentives to take up employment, among other 6

7 things, and will thus contribute towards increased flexibility on the labour markets and enhanced competitiveness. The Federal Government has undertaken to sustainably improve the opportunities for all adolescents to obtain training and employment, and to permanently reduce youth unemployment. Germany has further intensified its efforts to achieve this goal. The German economy greatly depends on the qualification and skills of its workers. The integration of young people into gainful employment is not only designed to ensure social cohesion, but also forms the basis of further economic success in Germany. Children are the future of society. However, especially women more often than not have to choose whether they want to work, or whether they want to have children. This is one of the reasons for the low birth rate in Germany, which will have negative effects on society s innovative capacity and on growth and well-being in the medium and long term. In addition to granting specific financial support to families, the Federal Government s family policy is therefore increasingly aimed at achieving better compatibility of family and labour and the integration of women and mothers into gainful employment, in addition to general labour and employment market policies. In this context, it is of central importance to provide an infrastructure of more and better education and care facilities to efficiently support families and children. Furthermore, the protection of the livelihood of families is to be promoted especially in the first months of a child s life if the family primarily wants to take care of its children itself (cf. section 4.7). 13. To improve Germany s innovative and competitive capabilities, women and men must have equal opportunities in order to equally contribute their resources and potentials to industry, society and politics. For this reason, the strategy of gender mainstreaming is continuously applied by the Federal Government and the federal states in order to ensure equal opportunities and eliminate existing discrimination. 14. The present implementation and progress report was prepared under the guidance of the Federal Government. It consists of two parts. The first part describes the strategy of reforms in Germany. In the second part, the concrete measures are described in detail in a table. The description includes references to the relevant sections of the table. The federal states were involved in the preparation of the report. The industry associations, trade unions and local government associations received the report for reference and comment. Both chambers of the German parliament discussed the report before it was submitted to the European Commission. The implementation and progress report will be published, thus offering a foundation for a continuous, extended and profound parliamentary and public debate about the further development of Germany s contribution towards the Lisbon strategy of the Community. 15. The member states of the European Union consider economic policy an issue of joint interest. The national reform programs as well as the relevant implementation and progress reports are part of the process of multilateral monitoring of the economic policy in which the member states cooperate with the Commission through the various Council bodies. In this context, the spring report of the Commission is of special significance. In view of the complexity of the task of providing an analysis and concise assessment of the economic policy in 25 member states, given their most diverse institutional systems and special national features, it appears to be extremely difficult to map this complexity by a manageable number of quantitative indicators. Most of the so-called structural indicators reflect partial aspects of the policy fields in question at best. The effect of reforms also decisively depends on the overall economic environment in which they take place. There- 7

8 fore, qualitative assessments cannot be dispensed with, given the institutional background of a specific country. 8

9 2. Economic situation and overall economic framework 2.1. Situation and perspectives of the German economy in the year According to international organisations, the global economy will continue to expand briskly, and international commerce will dynamically grow further. External impulses are most likely to remain strong, and export dynamics will persist. Due to its highly competitive prices and a further improvement of its competitiveness by declining unit labour cost, the German economy will continue to participate in this development. This mainly applies to the Euro zone. In general, there are good perspectives that the structural reforms in Germany will soon result in higher employment rates. 17. Although the economic situation had temporarily lost some of its momentum at the end of 2005, the German economy had a good start in the year Spirits are high in the German industry. The economic indicators provide good reason for this. Most of them are in line with an upward trend. Growth impulses are not only received from the world economy, but to an increasing extent also from within Germany. In addition to investments in industrial equipment, private and state consumption expenditure contribute to this positive trend. Initially, investments in the construction industry suffered from unusually strong weather-related impediments, but are gradually catching up now. In general, the economic development has gained in breadth, and the basic upward trend of the level of business activity has consolidated. On this background, there is no doubt that the economic growth of 1.5% forecast by the Federal Government in spring 2006 can actually be achieved. Germany will again contribute to stable prices in the Euro zone in the year Sustainable design of public finance - protecting social security Sustainable design of public finance 18. Establishing sound government finance is an important requirement for financial policy scope of action and economic sustainability. This can only be accomplished if the interaction between the development of public finance, economic growth, employment subject to mandatory social insurance and demographic change is consistently observed. Economic growth is a condition of sound public budgets, and vice versa. Higher growth creates more jobs, reduces the labour market expenditure and increases the tax income as well as the receipts of the social insurance. At the same time, sustainable public budgets are a prerequisite for mastering the challenges of demographic development and globalisation. A consistent consolidation of public budgets, continued structural reforms and the improvement of the quality of public finance are the cornerstones for economic growth. 19. The structure of the federal budget is characterised by expenses for social security, government pensions and interest payment. These items account for roughly two-thirds of the federal budget. 9

10 20. On the expenditure side, Germany has achieved distinct success in terms of consolidation in recent years. With a rate of 46.7 %, the public spending ratio reached its minimum since 1991 in the year The strategy of consolidation will be strengthened in order to ensure the sustainability of public budgets and the social security systems. The aim is to reduce the national deficit to less than 3% of the GDP again in 2007, to cut federal net borrowing to values below the investment volume, and to proceed with the strategy of budget consolidation in subsequent years until a balanced total government budget is achieved. 21. The consolidation volume necessary for that purpose is basically ensured by the 2006 Budget Supplement Act which was promulgated on 30 June 2006 (cf. tables no. 1 To 3). On the income side, the law package mainly provides for an increase in the standard rates of the value added tax and insurance tax by three percentage points each. The income achieved from one percentage point of turnover tax will be passed on to the Federal Labour Agency (BA) as a means of reducing the contribution rate to unemployment insurance to 4.5 %. At the same time, the previous federal subsidy paid to the BA to cover its deficit will be cancelled. Savings on the expenditure side will be achieved under the act by reducing the federal lump-sum contribution to the statutory health insurance, a reassessment of the funds transferred to the federal states with respect to public passenger transport based on the regionalisation act, and by cutting the annual bonus paid so far to federal employees to one-half. The relief achieved by federal, state and local government budgets under the Budget Supplement Act will grow from slightly below 0.8 billion Euros in the year 2006 to more than 18.1 billion Euros in the year 2007 and 21.7 billion Euros in 2008 to more than approx. 22 billion Euros in the year 2009 (federal government to be relieved by approx. 0.9 / 12.4 / 15.4 / 15.7 billion Euros). 22. In the future, the federal budget policy will continue to be consistently aimed at consolidation. All expenditures will be reviewed, the need for and financing options of new projects and burdens with financial effects on income and expenditure will be examined and balanced in the same policy area by defining new priorities. All measures are subject to financing reservations. Germany has a noteworthy record of success as regards the reduction of subsidies. Since 1999, federal subsidies have been halved to approx. 6 billion Euros today. More savings will follow. As a rule, new subsidies will only be granted in the form of financial assistance rather than tax exemptions, and existing ones will be converted into financial assistance wherever possible. Financial assistance will be limited in time and decline over time, and will be recorded in a format that will allow for success monitoring Making social security sustainable for the future - reducing nonwage labour cost 23. It is the aim of the Federal Government to achieve a comprehensive policy that promotes and strengthens cohesion between generations, and thus society as a whole. This concept not only encompasses support for persons in need on the basis of solidarity, which goes beyond pure subsistence protection but rather also covers socio-economic needs and the possibility of participating in social life, but also more self-responsibility and participation the workplace. The political aim is to achieve an equilibrium between selfresponsibility and solidarity. As regards major risks such as illness, accidents, disability, need of long-term care, reduced earning capacity, unemployment and old age, these aims are achieved by the social security systems which provide for reasonable and financially 10

11 sustainable protection. Reforms aiming at a long-term stabilisation of the social security systems and a sustainable consolidation of public budgets are important elements of socially balanced policies and a precondition of new scope of political action. 24. In addition to most diverse opportunities for enhanced growth and well-being, the necessary process of economic reorganisation is also associated with risks based on increased international competition. Especially affected are low-skilled persons. Also to be considered are individual social and health risks which can only be protected by government schemes based on solidarity. The promotion of social cohesion and equal opportunities are indispensable in order to counteract tendencies towards social exclusion and provide sufficient social protection to the individual, also in the case of disability to work. Safeguarding the social and economic participation of people is the central issue of the Federal Government s social policy. The National Strategy Report on Social Protection and Social Inclusion 2006 describes accompanying measures to this end. Reducing non-wage labour costs 25. Reducing non-wage labour costs is a central component of all efforts aimed at strengthening growth and employment. The Federal Government intends to permanently reduce social security contributions to less than 40%. The contribution rate to the statutory pension insurance was maintained at a stable 19.5% in previous years as well as in the year As already stated in the 2005 NRP, the moderate increase of the pension insurance contribution rate to 19.9% as per 1 January 2007 and of the statutory health insurance contributions by roughly 0.5 percentage points will be more than offset by the simultaneous reduction of the contribution rate towards unemployment, therefore, the social insurance component of the total cost of labour will be reduced. 26. Under the 2006 Budget Supplement Act dated 29 June 2006, unemployment insurance contributions will be reduced by two percentage points from currently 6.5% to 4.5% effective 1 January Reducing the non-wage labour cost will give new impetus to create additional jobs. To compensate this reduction at least in part, the Federal Labour Agency will receive the proceeds from one percentage point of the increased value-added tax rate (cf. Tables under no. 1 and section 21 hereof) Sustainable reform of old-age security 27. The pension reforms implemented in the past few years have already provided fundamental solutions to a sustainable financing of the pensions. The projected increase in public spending for old-age security as a percentage of the gross domestic product until the year 2050 was reduced from 5.5 percentage points to 1.7 percentage points according to current calculations performed at the EU level. The 2005 NRP had still assumed this figure to be 1.9 % on the basis of preliminary results. 28. In the medium term, the 2005 pension insurance report adopted by the government in March 2006 shows that the lower limit for securing the pre-tax protection level 1 as well 1 The pre-tax protection level is the proportion between the standard pension available (before taxes and without the average contribution rate to the health insurance and without the contributions to the long-term care insurance) and the available average wages. It is calculated for the so-called standard pensioner who has earned the national average income for 45 years, paid the corresponding contributions, and receives old-age pension as of age 65. However, the development of the pre-tax protection level can be transferred to all employment careers and the existing pension relationships (National Strategy Report on Old-Age Protection 2005). 11

12 as the upper limit of the contribution rate stipulated by law can be complied with in the time period until For this purpose, it is necessary to make up for lower pension adjustments that had not been previously implemented. In view of the sacrifices already made by the pensioners towards consolidation of the old-age pension insurance, the Federal Government will stabilise the benefit levels in the current parliamentary term and will not carry out any pension cuts. 29. Through the pension insurance report and the old-age security report, which was adopted at the same time, the Federal Government comprehensively informed the public about the situation of the statutory pension insurance, company and private provision for old age. The results of this statutory monitoring of old-age security confirm that elderly persons in Germany today are being well taken care of at old age, and that the same will be the case in the future. However, it is necessary that people make additional provisions for old age in addition to the statutory pension for this purpose. The total net benefit standard obtained from statutory pensions, government-promoted additional provision for old age (Riester pension) or a company pension and an additional private pension financed from the tax-exempted portion of the pension insurance contributions will remain stable in the long run for average wage-earners. For people with a low income, the total net benefit standard will even increase slightly in the long term. In the future, persons with children will receive significantly higher benefits because child-raising times have now been much better accounted for in the statutory pension insurance. Additional old-age provision 30. Building up additional funded provision for old age has been massively promoted by the state since the year For this purpose, a comprehensive set of instruments comprising tax elements and direct subsidies has been created. Compared to autumn 2005, the number of contracts made for the Riester pension had increased by approx. 1.5 million to around 6.2 million by late March Together with the existing entitlements to company pensions (status in mid-2004: approx million), some 20 million employees presumably obtained state-subsidized additional provision for old age. In order to further improve the support of families with children, the child subsidy for the Riester pension will be increased from 185 Euros to 300 Euros per year for children born after 1 January 2008 (cf. table no. 4). Besides, due to their great popularity as provision for old age, owner-occupied flats will be better integrated into subsidised provision for old age in the future. 31. The Federal Government will increase the population s awareness of its own pension level and identify opportunities of further providing for old age. This is the starting point of the Fit-in-Altersvorsorge (fit in provision for old age) which was initiated by several federal ministries in cooperation with the pension insurance funds, the German association for adult education, the social partners and the federal association of consumer protection agencies. Raising the pensionable age - increasing gainful employment of elderly persons 32. The rate of employment of elderly employees has already increased (from 37.5 % in the year 2000 to 45.4 % in 2005) and is designed to rise further through a sustainable improvement of the labour market situation combined with a change in mentality in human resources strategies of companies and the envisaged rise in the statutory pensionable age. Among other things, limited contracts of employment with elderly employees will be governed by new provisions from the age of 52 on (cf. table no. 110). 12

13 33. Due to the trend reversal of the practice of early retirement by, e.g., raising the old-age limits and the parallel introduction of actuarial pension discounts, the average retirement age rose from 62.4 in 1995 to 63.2 years in the year Germany will continue on this path by raising the age limit for obtaining old-age pension from 65 to 67 years by the year 2029 as resolved by the Federal Government on 1 February Both the benefit level of the statutory pension insurance and the contribution rate will be kept stable in the long run by this measure (cf. table no. 5). On the labour market, these measures will be accompanied by the specific support of elderly employees and workers in the course of the Initiative 50plus Reform of the health sector 34. The health insurance modernisation act, which came into force in 2004, was a first step towards the medium- and long-term stabilisation of the system of the statutory health insurance (GKV). However, additional measures will have to be taken in view of demographic change and the financial development of the GKV. For this reason, the lawmaking bodies have agreed upon immediate action. The act for improving the economic efficiency in drug supply (AVWG) which came into force on 1 May 2006, contains measures by which the statutory health insurance funds will save 800 million Euros already this year (cf. table no. 6). Among other things, reference prices were readjusted. With the regulation of reference prices it is ensured that a sufficient choise of drugs will still be available. Real innovation, i.e. therapeutic improvements, will remain exempted from the fixed amounts. Furthermore, the health insurance funds may conclude special discount agreements with the manufacturers in order to make drugs with higher prices than the fixed amount available to the insured at no extra cost. In addition, physicians will be made accountable more than before for the economic efficiency of their drug prescriptions (so-called bonus-malus" rule). 35. A need for quick action was also identified with respect to the nation-wide availability of physicians. For this reason, the Federal Government has initiated a draft Amendment to the law concerning Statutory Health Insurance Physicians (cf. table no. 7). Under this Amendment, the law governing the contractual relationship between and the statutory health insurance physicians will be liberalised in order to prevent medical bottlenecks especially in rural areas. Furthermore, regulations concerning the reduction of impediments in the establishment of medical service centres as well as an extension of start-up financing for integrated medical services by one year will ensure that health care are improved. Reducing non-wage labour costs 36. In the system of statutory health insurance, the contributions of the employees and the employers will be stabilised as of the year 2008 through co-financing from the national budget. In the course of a legally defined process of adjustment, inevitable cost increases based on medical progress and demographic development will be borne first by a growing subsidy from the national budget and - to the extent that this is not sufficient - by the employers and insured on equal terms. The structural changes that will be initiated by the 2006 health reform will lead to an increased medium- and long-term efficiency within the system of statutory health insurance and decelerate the rise in expenditure that would otherwise have to be expected. 13

14 Reform concept for sustainable financing of the statutory health insurance (GKV) and for further quality and efficiency improvements 37. In view of great challenges, not least due to the demographic change and the progress in medicine and medical technology, combined with a tendency of a weak increase in or even stagnating income from contributions, the health sector has to be improved continuously. The number of elderly people will significantly rise over the next few decades in Germany. This rise will be associated with higher expenditures in the health system which will require additional financing. By beginning to finance some elements of societal tasks in the statutory health insurance from the federal budget, the resources of the statutory health insurance will be placed on a more stable, more equitable and employment-promoting basis in the long run. The financial reforms to be initiated this year will also be linked with a reform of the healthcare structures in order to ensure that the funds available will be used more efficiently and more effectively in the future (cf. table no. 8). 38. For this reason, the reform concept of the Federal Government for medium- and longterm stabilisation of the statutory health insurance places special emphasis on the following objectives: To ensure that all citizens are covered by health insurance. To guarantee the access of all insured to all necessary health services - regardless of the amount of contributions paid by the individual. To ensure sustainable financing and a liberalisation of the dependency between financing health care and wages. Intensified competition between health insurance funds and service providers. Fair competition between private health insurance companies and statutory health insurance funds. To improve the quality and efficiency of health care through more structural reforms. 39. The cornerstones of a health reform that were adopted in July 2006 basically include the following points: New provisions regarding more flexible and more competitively designed relations between patients and physicians, between insured and health insurance funds, and between health insurance funds and service providers (optional tariffs, copayments, greater contractual liberties of the insurance funds, new system of physicians reimburesement, cost-benefit analysis of drugs, improved interaction between outpatient and inpatient services, further development of integrated health care, streamlining of organisational structures). Establishment of an overarching, central health fund which will be funded not only by employee and employer contributions but gradually also by tax subsidies to account for societal tasks within the GKV. Beginning of gradual tax funding of societal tasks (children) from the federal budget as of Easier change by insured persons between private health insurance companies (portability of reserves for old age, creation of a basic rate for all persons voluntarily insured with private health insurance companies with mandatory contracting and without exclusion of benefits, risk assessment or risk mark-ups), maintenance of private health insurance as comprehensive insurance. 14

15 Establishment of prevention as an independent pillar of the health sector 40. The strategy to strengthen health prevention that was initiated in the last parliamentary term was interrupted by the premature German federal elections. For this reason, the law that had already been adopted by the parliament in this context could not come into force, but the government coalition has taken up this project again in its coalition treaty. By the planned prevention law, cooperation and coordination as well as the quality of the measures of the social security funds will be improved without excessive bureaucracy and aligned with the goals of prevention (cf. table no. 9). Designing a sustainable long-term care insurance 41. The Federal Government will continue to develop and design a sustainable long-term care insurance. This social security sector is also characterised by the clear need for legislative action by the legislators. Further developing the long-term care insurance is part of the renewal of the social security systems in the Federal Republic of Germany. At the moment, a reform concept is being developed on the basis of the coalition treaty which will safeguard sustainable financing for this social security sector and will also ensure the greatest possible fairness in distributing the expenses of the long-term care insurance resulting from demographic development across the generations. This includes supplementing the pay-as-you-go principle by funded elements as a demographic reserve and balancing the different risk structures of statutory and private long-term care insurance (cf. tables no.10 and 11) Completing German unity 42. The new German states have impressively caught up. This applies, in particular, to the manufacturing sector. Nevertheless, recovery in east Germany still enjoys great priority in the Federal Government. The efforts of the Federal Government directed at a recovery in east Germany are focused on four objectives to which the promotion by the EU structural funds is equally committed: Strengthening growth and employment Improving innovative capabilities Ensuring regional and social cohesion Competitiveness at the international and European level 43. Strengthening growth and employment is mainly achieved in east Germany by broadening the industrial basis which provides new impulses for the development of the service sector also. For this reason, the Federal Government has extended the investment subsidy for the new German states until 2009 and opened it for investments in the field of tourism (cf. table no. 12). The joint scheme for improving regional economic structures is continued at high levels (cf. table no. 13). The new states still rank as maximum promotion areas under the joint scheme and the law of subsidies. Furthermore, new and revised programmes for promoting small and medium-sized enterprises will include additional promotional preferences for east Germany (cf. table no. 14). The EU promotion of structures in the new German states is increasingly based on the objectives of the Lisbon strategy. 44. In addition to this broad promotion approach, the Federal Government relies on providing targeted support to specific regional and sectoral targets, thus accounting for the in- 15

16 creased differentiation of economic development in the new states. The policy of promotion is guided by the principle of Strengthening strengths - sharpening profiles. It is focused on promoting growth cores and sectoral clusters. One of the central fields of action includes the networking of potentials in business and research (cf. table no. 15). The well-equipped public research environment in the new states still has to contribute a greater share towards regional economic growth (cf. tables no. 16 and 23). Another means of strengthening regional growth engines is the improvement of the transport infrastructure. The identification of weak points in the gateways (e.g. air transport and logistics locations, analysis of deficits in rail-bound traffic) and the improvement of the quality of traffic links with the new EU member states are of special importance. The corresponding conclusions will be included in the implementation of the federal transport route scheme The high unemployment rate continues to be the greatest challenge faced by social cohesion in the new states. In addition to taking measures aimed at strengthening growth and employment, the Federal Government is making efforts to reintegrate unemployed persons into the primary labour market and to preserve their working capability. To this end, 40 % of all integration funds of the Federal Labour Agency are used to finance measures to assist long-term unemployed adults and youths in the new German states. The increased regional differentiation in the new states is counteracted by targeted strategies for a sustainable development of rural areas. Important steps in this area include the promotion of regional development potentials and safeguarding the provision of infrastructure in sparsely populated areas. 46. On the background of ongoing globalisation, the new states increasingly have to meet the challenge of international competition. International competitiveness is enhanced by a stronger sectoral profile in the individual regions and powerful investor advertising. To this end, the Industrial Investment Council (IIC) and Invest in Germany are merged into a company for locational marketing and investor relations. It is planned to endow more funds to this new company Reform of federalism - clear delineation of responsibilities 47. The upper and the lower house of the German parliament have adopted a far-reaching reform of the federal system of responsibilities. The reform of federalism will help to distinguish the competencies of the federal and state governments more clearly, especially in the field of law-making. The capacity of the federal and state governments to take action and make decisions will be improved, political accountabilities will be more clearly assigned, and the purposefulness and efficiency of compliance with obligations will be increased (cf. table no. 17). 48. The reform basically covers the following areas: Reform of the rights of the Bundesrat (upper house of parliament) by considerably reducing the number of laws that require its approval and introduction of a new requirement, namely, that approval to federal legislation is mandatory if it is associated with considerable cost. In return, the opportunities of the state parliaments to design entire fields of policy will be strengthened. Reform of the law-making competences by abolishing framework laws and reorganising the range of concurrent legislative powers. In this field, legislation will become 16