OECD Economic Survey of Germany 2025 - Brochure by OECD

OECD ECONOMIC SURVEYS

GERMANY 2025

EXECUTIVE SUMMARY

JUNE 2025

• The energy crisis and geo-political tensions have emphasised the need to accelerate structural reforms

• Reducing policy uncertainty and combining the reform of fiscal rules with structural reforms is essential for supporting the economic recovery

• Fostering competition is key to revive business dynamism and economic growth

• Addressing skilled labour shortages is needed to support economic growth

• Fostering regional development is key in times of structural change

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Publishing, Paris https://doi.org/10.1787/39d62aed-en

THE ENERGY CRISIS AND GEO-POLITICAL TENSIONS HAVE EMPHASISED THE NEED TO ACCELERATE STRUCTURAL REFORMS

Fostering business dynamism and innovation while addressing skilled labour shortages and raising infrastructure investments would help revive economic growth. Supporting regions to thrive during the green and digital transition would help maintain high living standards across the country.

After a decade of strong export-led growth, fiscal surpluses and falling unemployment, economic growth has slowed down. Supply chain bottlenecks during and after the COVID-19 pandemic, higher energy prices and rising trade tensions have affected the globally integrated German economy more than others. Strong government support and a quick substitution of Russian pipeline gas by gas from other sources have prevented a deeper economic downturn. The rapid expansion of renewable energy supply has improved energy security. However, structural challenges remain that had already weighed on growth even before the pandemic started.

Continuing to accelerate structural reforms is key for reviving economic growth. Reducing the administrative burden, including by accelerating the digitalisation of the public sector, and fostering competition will help raise business dynamism and productivity growth. Skilled labour shortages should be addressed by improving labour supply incentives for women, older and low-income workers, further lowering barriers to skilled migration and strengthening education and training policies. Designing policies to help regions embrace structural change while ensuring the provision of key public services and public investment is key for maintaining high living standards across the country.

REDUCING POLICY UNCERTAINTY AND COMBINING THE REFORM OF FISCAL RULES WITH STRUCTURAL REFORMS IS ESSENTIAL FOR SUPPORTING THE ECONOMIC RECOVERY

Raising spending efficiency, reallocating spending and broadening the tax base, while addressing rising spending pressures due to population ageing, would help fund infrastructure and defence spending and ensure medium-term fiscal sustainability.

GDP will grow by 0.4% in 2025 and 1.2% in 2026. Declining domestic policy uncertainty, following the formation of a new government, and higher real wages will support a recovery in private consumption. Defence spending and infrastructure investments are set to increase strongly due to the recent reform of fiscal rules and large investment needs. Although high tariffs and trade policy uncertainty will hamper exports and investments in export-oriented manufacturing, total private investment will pick up, supported by high corporate savings and declining interest rates. Core inflation will remain elevated due to a tight labour market and rising domestic demand.

The quick approval of a 2025 budget is key for further reducing policy uncertainty, including on public investment plans. Infrastructure planning and approval procedures and procurement processes should be accelerated to ensure the quick implementation of investment and spending plans. To avoid rising inflationary pressures due to the significant demand shock, it is key to reduce the administrative burden and barriers to competition and address skilled labour shortages, particularly in the construction sector.

Ensuring medium-term fiscal sustainability will hinge on raising spending efficiency,

Figure 1. Economic growth has slowed down

reallocating spending and broadening the tax base. Accelerating the digitalisation of the public administration, improving policy impact evaluation and public procurement, and broadening the scope of spending reviews could help increase spending efficiency. Raising more revenue by increasing property taxes, reducing tax expenditures in capital income, inheritance, VAT and environmental taxation and strengthening tax enforcement would also help address fiscal pressures and allow to lower high labour taxes.

Rising spending pressures due to population ageing should be addressed by reforming the public pension and health systems. Gradually phasing out fiscal incentives for early-retirement, while improving working conditions and incentives for older workers to work longer, would help stabilise the pension system and raise labour supply.

Complementing the recent hospital reform with further measures to strengthen outpatient care and continuing to accelerate the digitalisation of health services would help raise spending efficiency and treatment quality.

Strengthening funded occupational pension plans could improve social protection and help deepen capital markets. More than half of workers are covered by occupational pension schemes but a significant share of these schemes is based on book reserves and unfunded. Gradually phasing out book reserves by introducing mandatory enrolment in asset-backed occupational pension schemes for new employees, raising regulatory limits for investment in private assets and strengthening financial literacy among social partners would help deepen capital markets.

Table 1. Private consumption will lead the recovery

Source: OECD Economic Outlook 117 database.

FOSTERING COMPETITION IS KEY TO REVIVE BUSINESS DYNAMISM AND ECONOMIC GROWTH

Barriers to entry and firm growth have weighed on business dynamism, innovation and productivity growth. Reducing the administrative burden, including by accelerating the digitalisation of the public sector, and making regulation more competition-friendly would help foster business dynamism, innovation and productivity growth.

Barriers to competition in services remain high. Occupational entry regulations and licensing requirements to open a business are high and should be reduced. The scope of state-owned enterprises (SOEs) is larger and their governance weaker than on average in the OECD, and the enforcement of competitive neutrality has room for improvement. Strengthening the power of the competition agency to challenge decisions by public bodies and regulators that hamper competition, while improving transparency on public subsidies to SOEs, would help. Continuing to fight corruption is key to level the playing field.

Accelerating the digitalisation of public administration would help reduce the administrative burden. A one-stop shop for starting a firm does not exist, as many decentralised registers and administrative procedures are still not digitalised or inter-linked. Setting mandatory common IT standards and encouraging the harmonisation of administrative procedures across levels of government, while improving digital skills of public employees, is key. Recent efforts to review, simplify and harmonise regulations and administrative procedures across levels of government should be expanded.

Figure 2. Post-entry growth of firms is weak

ADDRESSING SKILLED LABOUR SHORTAGES IS NEEDED TO SUPPORT ECONOMIC GROWTH

High-skilled labour shortages are related to a decline in working hours and rising skill mismatch, and will be exacerbated by rapid population ageing. It is key to raise labour supply incentives, particularly for women, older and low-income workers, improve education and training policies, and facilitate skilled migration.

High part-time employment, particularly among women, leads to low working hours. Lowering the marginal tax rate on second earners while improving the provision of all-day childcare would help raise female labour supply. Social security and tax exemptions for part-time work (Mini-jobs) should be restricted to students, while withdrawal rates of social benefits should be reduced.

Fiscal incentives for early-retirement contribute to explain why many well-educated and healthy workers leave the labour market before the legal retirement age, while skilled labour shortages are high. These incentives should be phased-out so that pension benefit reductions when retiring early are at least actuarially neutral.

A high share of young adults has no professional degree due to weak foundational skills, while structural change will require more up- and reskilling of workers. Improving adult education and the VET transition system, while raising the quality of early-childhood and basic education, including by introducing a mandatory pre-school year focusing on foundational skills, should become a key priority. To raise training quality and participation, standardised quality certifications that set clear benchmarks for content, teaching quality, and learning outcomes of training courses should be established, while funding for nonformal training and re-skilling should be expanded.

Figure 3. Firms face severe difficulties to fill open positions Firms reporting difficulties recruiting, 2022-2023, % of firms

Source: Filippucci, Laengle and Marcolin (forthcoming) based on GFP Employer Survey data.

FOSTERING REGIONAL DEVELOPMENT IS KEY IN TIMES OF STRUCTURAL CHANGE

Regional disparities remain high and green and digital transitions risk widening gaps. Fostering regional development requires better coordination of place-based, with industrial, infrastructure and innovation policies and improving the financial and administrative capacity of municipalities.

Inter-governmental transfers impacting regional development should be better coordinated. Placebased policies are not coordinated with conditional federal grants or industrial policies, which have much larger funding size. While objectives may differ, target areas often overlap, reducing spending efficiency.

Municipal revenue from recurrent taxes on immovable property is low, although house and land prices have strongly risen. Using updated property values to raise property tax revenue would improve municipal finances and incentives for spending efficiency, as local populations have stronger incentives to hold local governments accountable. Strengthening cooperation across municipalities, including joint procurement initiatives, has large potential to raise spending efficiency and improve administrative capacities.

Grid charges are higher in areas with high renewable energy supply. This reduces public

acceptance of renewables and incentives for firms to relocate to where green electricity is produced. As many of these regions are poorer, equalising network charges or further improving grid charge incentives for firms to relocate to areas with renewable electricity supply could support regional development objectives and the green transition.

The green and digital transitions will require reallocation of labour across sectors and firms and risk increasing inequalities. Expanding re- and upskilling opportunities for the unemployed, including by completing VET degrees or formal education, and improving coordination between public employment services and local employers is key for reducing individual adjustment costs and addressing skilled labour shortages. Using revenue from carbon pricing to support vulnerable households can minimise adverse distributional effects more generally and raise acceptance for the green transition.

■ MAIN FINDINGS | ● KEY RECOMMENDATIONS

STRENGTHENING FISCAL POLICY AND FINANCIAL MARKETS

■ Investment is needed to improve defence capacity and address a large infrastructure backlog. Recent reforms of the fiscal framework allow additional borrowing to address these needs, while spending pressures will further increase due to rapid population ageing.

● Create fiscal space for public investment by raising spending efficiency, reallocating spending and broadening the tax base, including by reducing tax expenditures and strengthening tax enforcement.

■ Effective labour taxes are high, reducing labour supply incentives. Revenue from property, capital gains and inheritance taxes and excise duties on alcohol and tobacco is low relative to other OECD countries.

● Lower personal income taxes, while raising revenue from property taxes and excise duties on alcohol and tobacco and reducing tax expenditures in capital income, inheritance, VAT and environmental taxation.

■ Around half of workers are covered by an occupational pension scheme but a significant part of these schemes are based on book reserves and are unfunded, reducing available funds in capital markets.

● Gradually phase out book reserves by introducing mandatory enrolment in asset-backed occupational pension schemes for new employees.

FOSTERING COMPETITION TO REVIVE BUSINESS DYNAMISM AND PRODUCTIVITY GROWTH

■ High administrative burden is related to complex regulations and administrative procedures that differ across Laender and municipalities, hampering firm entry and growth in many markets, e.g. in construction.

● Expand efforts to review, simplify and harmonise existing regulations and administrative procedures across levels of government.

■ The administrative burden for starting a company is high. A one-stop shop does not exist because many decentralised registries and administrative procedures are not yet digitalised or interlinked.

● Set mandatory common standards on design and interlinkage of data and IT tools, while addressing legal hurdles to the inter-linkage of decentralised registries, and establish a one-stop shop for all administrative procedures required to start a firm.

■ Barriers to competition in services remain higher than the OECD average. Many workers are subject to licensing and qualification requirements, while labour shortages are a major supply constraint.

● Reduce occupational entry restrictions, particularly in crafts and trade related occupations.

■ The new market investigation tool requires consensus with the regulatory agency to address market distortions. Recent licensing decisions for local infrastructure provision have favoured municipal SOEs.

● Strengthen the power of the competition agency to challenge decisions by public bodies and regulators that hamper competition.

■ Capacity constraints, duplications and weak cooperation between law and tax enforcement authorities of the Laender and the federal level complicate the fight against money laundering and tax crimes.

● Implement plans to establish the Federal Financial Police, and strengthen its investigative capacities, data access and cooperation with enforcement agencies of the Laender.

■ MAIN FINDINGS | ● KEY RECOMMENDATIONS

ADDRESSING SKILLED LABOUR SHORTAGES

■ More than one sixth of the workforce works in part-time jobs exempted from employees’ social security contributions (Mini-Jobs), where social protection, training access and career prospects are low.

● Restrict Mini-Jobs to school and university students and make social security contributions increase progressively for earnings below the current Mini-job threshold.

■ The effective age of labour market exit is significantly below the legal retirement age. Early-retirement schemes are mainly used by workers with higher education and incomes and above-average health status.

● Phase-out fiscal incentives for early-retirement so that pension benefit reductions when retiring early are at least actuarially neutral, and link the statutory retirement age to life expectancy.

■ The joint income taxation of married couples leads to high marginal income tax rates for second earners. More than half of women work part-time in jobs for which they are over-qualified.

● Lower the marginal tax rate for second earners by reforming the current joint taxation of couples.

■ The lack of harmonised quality standards and certifications in the fragmented CVET system weighs on training quality and creates information asymmetries hampering training participation.

● Create standardised quality certifications that set clear benchmarks for content, teaching quality, and learning outcomes of CVET courses.

■ Educational outcomes have deteriorated and educational inequality remains high. The quality of early-childhood education is key for skills development later in life.

● Introduce a mandatory high-quality pre-school year and lengthen the school day in primary school while raising hours for teaching of foundational skills.

FOSTERING REGIONAL DEVELOPMENT IN TIMES OF STRUCTURAL CHANGE

■ Conditional federal grants or industrial policies are not coordinated with place-based policies. While objectives may differ, target areas often overlap.

● Better coordinate conditional federal grants and industrial policies with place-based policies to improve spending efficiency and the effectiveness of regional development policies.

■ Municipal revenue from recurrent taxes on immovable property is low, although house and land prices have strongly risen and municipal finances suffer from strong cyclicality of revenues.

● Use the recent update of property values to better link property taxation to market values and raise revenue, while providing tax deferrals to cash-poor homeowners.

■ Grid charges are higher in areas with high renewable energy supply, reducing public acceptance of renewables and incentives for firms to relocate to where green electricity is produced.

● Ensure that recent reductions on network charges are passed on to users and consider further improving grid charge incentives for firms to relocate to areas with renewable electricity supply.

■ Many workers will need to change jobs during to the green and digital transitions. Formal vocational education and training courses (VET) are of high quality.

● Expand opportunities for the unemployed to complete formal VET degrees and further improve coordination between public employment services and local employers.

OECD Economic Surveys GERMANY 2025

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