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The
Economic Freedom
Network

  

Germany

Total Government Expenditures

Economic Freedom Rating

As a Percent of GDP
germany.gif (6088 bytes)

Part 1: The Economic Freedom Ratings for the Components and Various Area and

Summary Indexes: 1975, 1980, 1985, 1990 and 1995.

(The numbers in parentheses indicate the actual values for the components.)

Components of Economic Freedom

1975

1980

1985

1990

1995

I. Money and Inflation

8.8

9.4

9.7

9.1

9.7

(a) Annual Money Growth (last 5 yrs.)

6

(10.5)

8

(7.0)

9

(5.1)

7

(10.2)

9

(4.8)

(b) Inflation Variablity (last 5 yrs.)

10

(0.9)

10

(0.5)

10

(1.0)

10

(0.7)

10

(1.0)

(c) Ownership of Foreign Currency

10

10

10

10

10

(d) Maint. of Bank Account Abroad

10

10

10

10

10

II. Government Operation

4.5

4.9

4.9

6.4

6.8

(a) Gov't Consump. (% of Total Consump.)

1

(26.5)

1

(26.3)

1

(26.1)

2

(25.2)

2

(25.5)

(b) Government Enterprises

6

6

6

6

6

(c) Price Controls

-

-

-

9

9

(d) Entry Into Business

-

-

-

-

7.5

(e) Legal System

-

-

-

-

7.5

(f) Avoidance of Neg. Interest Rates

8

10

10

10

10

III. Takings

2.7

2.2

1.7

2.2

1.8

(a) Transfers and Subsidies (% of GDP)

2

(17.4)

2

(17.6)

2

(19.0)

2

(17.9)

1

(21.6)

(b) Marginal Tax Rates (Top Rate)

4

(56)

3

(56)

2

(56)

3

(56)

3

(57)

(c) Conscription

0

0

0

0

0

IV. International Sector

8.8

9.0

9.8

9.7

9.2

(a) Taxes on International Trade (Avg.)

10

(0.0)

10

(0.0)

10

(0.0)

10

(0.0)

10

(0.0)

(b) Black Market Exchange Rates (Prem.)

10

(0)

10

(0)

10

(0)

10

(0)

10

(0)

(c) Size of Trade Sector (% of GDP)

6

(23.2)

7

(26.7)

9

(30.8)

8

(29.0)

5

(22.5)

(d) Capital Transactions with Foreigners

8

8

10

10

10

Economic Freedom Rating

5.9

6.0

6.1

6.4

6.4

Ranking of Country

13

10

14

14

25

 

Part 2: Recent Economic Indicators:

Population 1996:

81.9

Real Per Capita GDP

:

1996 =

$21,387

(in millions)

(in 1995 U.S. dollars)

Annual Rate of Change (1985-96):

0.4%

Avg. Growth Rate:

1980-90=

1.8%

1990-96=

2.3%

Economic Indicators:*

1988

1989

1990

1991

1992

1993

1994

1995

1996

Change in Real GDP: Aggregate

3.6

3.7

5.9

4.9

1.8

-1.7

2.3

2.5

2.5

: Per Capita

3.2

3.3

5.5

4.5

1.4

-2.1

1.9

2.3

2.5

Inflation Rate (CPI)

1.3

2.8

2.7

3.5

4.0

4.1

3.0

1.8

1.4

Change in Money Supply: (M1)

11.7

5.7

27.9

4.2

11.5

8.8

4.9

7.1

11.2

: (M2)

5.8

5.1

18.6

6.4

7.9

11.6

2.5

4.6

7.7

Investment/GDP Ratio

22.8

23.6

24.6

25.9

25.1

23.9

24.5

22.7

22.4

Size of Trade Sector (% of GDP)

27.0

28.8

29.0

30.7

30.0

21.9

22.4

22.5

-

Total Gov't Exp./GDP Ratio

46.3

44.8

45.1

47.9

48.5

49.5

48.9

50.6

51.0

General Government Budget

Deficit (-) or Surplus (+)

As a Percent of GDP

-2.2

+0.1

-2.1

-3.3

-2.8

-3.5

-2.4

-3.5

-3.9

Unemployment Rate

7.6

6.9

6.2

7.3

7.7

8.9

9.6

9.4

10.4

* The figures in this table are in percent form.

a Prior to 1991, data are for West Germany only.

p Preliminary.

While the economic freedom rating of Germany has improved slightly during the last two decades, its relative position has fallen as other countries have liberalized their economies. In 1995, the German economy ranked 25th (tied with Argentina, Bolivia and Chile), down from its 14th place ranking in 1990 and 10th place finish in 1980.

Monetary and price stability, freedom to maintain bank accounts in other currencies, a stable and competitive credit market, and a relatively free trade sector constitute the strengths of this economy. There are three major weaknesses: a high level of government consumption, a large transfer sector, and high tax rates. Throughout most of the last two decades, approximately 25% of the consumption expenditures have been allocated by the government rather than directed by markets. During the same period, 20% of GDP has been consistently taxed away from its earner and transferred to someone else. Government expenditures now account for more than half of GDP. Of course, big government means high taxes. Since many high-income countries cut taxes during the last decades, Germany’s top marginal tax rate of 56% is among the highest in the world. (Note: if the surtax imposed on church membership were counted, the top rate would exceed 60%.) Several political leaders, including the finance minister, have proposed substantial reductions in tax rates, but the tax cut proposals face an uncertain future as the German economy stagnates and the budget deficit increases.

The German economy needs economic liberalization. The highly regulated German labor market is inflexible. This inflexibility, along with generous transfer benefits, has pushed the unemployment rate to its highest level in fifty years. The German social security system needs liberal reform—the provision of private sector investment options, for example. Given its price stability, strong and competitive trade sector, and high investment rate, this economy will probably continue to perform reasonably well in the future. If Germany continues on its present course, however, its future income relative to other countries will almost surely decline.


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