At the top of the Grand Coalition’s agenda was the consolidation of public sector finances. Regrettably, however, the government has focused less on the spending side than on the revenue side. The tax increases passed add up to a burden on the private sector of EUR 15bn in 2007. The outline of the corporate tax reform drawn up by the government falls short of the targets laid out in the coalition agreement, but overall does represent progress in terms of the corporate tax load.
The Grand Coalition: An interim snapshot
On pension policy, the previous government had already done much of the groundwork. By raising the retirement age, the Grand Coalition has undertaken a further – long overdue – step to safeguard the pension system.
On health insurance there was a typical coalition compromise which bars neither party from continuing to pursue its favored model. But the planned increase in contributions deserves criticism as it places an additional burden on the factor labor. Nor has the health system been prepared for the demographic challenges ahead. Reform of the nursing care insurance system still needs to be addressed. What is needed is the indexation of benefits to preserve their real value, and a switch to funded system.
However, progress has been made on federalism reform which has been on the agenda for so long. The proportion of laws requiring Bundesrat (upper house) approval will drop from around 60 % to between 35 and 40 %. However, reform of the financial constitution still does not go far enough. The German states should in principle be given the right to legislate on the taxes to which they alone are entitled. The tax pooling system between the federal and state governments is also still in need of an overhaul.