This blog was first published in English and German by the OECD blog Ecoscope.
By Flurim Aliu (Council on Economic Policies), Robert Grundke (OECD) and Christian von Haldenwang (German Institute of Development and Sustainability).
Since the 1960s, Germany has been among the first countries to publish regular reports on tax expenditures. Today, however, its tax expenditure reporting is incomplete and lacks consistency. Reforms are needed to increase transparency related to tax expenditures and enable a better prioritization of the use of public resources.
As argued in the 2023 OECD Economic Survey of Germany, addressing the large accumulated investment backlog and investment needs related to the green and digital transitions will require a large amount of public resources. At the same time, rapid population ageing increases public spending pressures in pension, health and long-term-care systems and exacerbates labour shortages. Lowering labour taxes to improve incentives to raise labour supply, particularly for low-skilled workers and second earners, could further reduce fiscal space. To tackle these challenges while safeguarding fiscal sustainability, it is crucial to increase public sector spending efficiency and better prioritise spending.
To this end, transparency on spending items is key. As in many other countries, the use of public resources to grant beneficial tax treatments (or tax expenditures) is less well reported and scrutinized in Germany than direct spending. Tax expenditures are defined as deviations from a benchmark tax system that typically benefit specific sectors, groups of individuals or activities. Policymakers use them to pursue different objectives, such as attracting investment, promoting employment or fighting poverty.