Consult this publication on line at

4.3. Long-term sustainability issues
The Federal Ministry of Finance periodically produces a 
Report on the Sustainability of
Public Finances
(“Sustainability Report”). Three Sustainability Reports have been produced
between 2005 and 2011. The reports and the current update, whose underlying projections
are carried out by external researchers, provide a clear and accessible overview of the
evolution of the public finances over a long-term (50-year) horizon, taking compliance with
the debt-brake fiscal rule in the near-term (4-year) horizon as a starting assumption. For
the period after the 4-year horizon, which corresponds with the Financial Plan that
accompanies the budget, it is assumed that the existing policies remain in place so that the
underlying trend of expenditures and revenues – in the absence of budgetary policy action
or structural economic reform – can be discerned.
The Sustainability Report takes a whole-of-government approach encompassing the
Länder
, municipalities and their social insurance schemes. The report takes a long-term
approach in the broad sense – providing a context for the evolution of demographic drivers
over the period since 1871, and of public debt since 1950. 
As regards assumptions and scenarios for the analysis, the report adopts two base
scenarios – optimistic (Variant T+) and pessimistic (Variant T-) according to the respective
set of assumptions regarding long-term developments in demographics, the labour market
and general economic growth. On the basis of these assumptions, the key result is a
projection for the debt-to-GDP ratio (as a percentage of GDP) over the projection period. For
the 2011 Sustainability Report, the result shows a sharp increase in the debt ratio from 83%
in 2010 (the starting point) to 300% by 2060 under Variant T-, with a much more modest
increase to just over 100% of GDP under Variant T+. 
Given the wide disparity between these two results, it is particularly important to avoid
confusion (or complacency) in the minds of policy-makers, particularly (but not exclusively)
at the political level, and to focus upon operational policy messages. The report indeed
attempts to do so by conducting a sensitivity analysis which decomposes the factors
accounting for the difference between the T- and T+ variants. This analysis shows how
changes to baseline assumptions affect the evolution of the debt ratio, and indicates that
policies addressing some of these factors (e.g. net immigration and unemployment) could
have a strong positive effect, whereas other factors (e.g. the fertility rate) do not have a
strong bearing on sustainability at least over the projection period. Moreover, analysis of
alternative scenarios and policy simulations relating to other policy areas – notably
population health and the operation of the statutory long-term care insurance programme –
also yield insights into the sustainability impact of these policy areas. 
The issue of long-term sustainability of public finances is one which, in broad terms,
has commanded the attention of Germany’s most senior policy makers,
20
 and it is likely

---

BUDGET REVIEW: GERMANY
OECD JOURNAL ON BUDGETING – VOLUME 2014/2 © OECD 2015
52
that analyses such as those provided in the Sustainability Report over the years have
played a role in this development. The reports give a clear message about the impact of
demographic and other factors and of the scale of policy action that is required over several
parliaments (or “legislative periods” as they are referred to in Germany). On the other hand,
the acknowledged importance of the topic is not matched by the attention that is accorded
to the Sustainability Report and its findings; the document appears to be viewed as a
worthy official study rather than a major fiscal reporting event such as the annual budget. 
To address this shortcoming, and command greater engagement of policy-makers, the
existing strengths in the report should be built upon. The risk of identifying “long-term”
problems is that policy-makers may regard the solutions as something to be likewise
addressed over the long-term, rather than factored into current budgetary plans. This risk
is perhaps accentuated by explicitly assuming – as the report does – that the government’s
medium-term plan will be adhered to, and confining itself to policy variants beyond that
horizon. Through this approach, politicians and senior bureaucrats may be receiving an
unintended signal that the policy messages contained in the report are not relevant for
them, but for the generation of policy-makers who will succeed them. It is also notable that
there is at present no requirement on line ministries, or on the government as a whole, to
respond to the report or to devise strategies to close the sustainability gaps identified.
As regards the policy priorities themselves, there is scope to sharpen these and make
them more relevant. The sensitivity analysis conducted by the Federal Ministry of Finance is
useful for explaining the differences between the T+ and T- policy variants, and some policy
messages may be inferred from these. However, it would be wrong to confine an analysis of
long-term sustainability policy to the options emerging from such a technical analysis: there
are undoubtedly a range of other policy factors which, while not relevant to the T+/T-
distinction, would nevertheless impact significantly on long-term debt trends. The
population health analysis, which is dealt with summarily in the report, is one good example
of such a policy option; other options would arise in other social and economic areas. A
Sustainability Report might have more direct impact as a tool of fiscal policy if it a) provided
a more comprehensive – and perhaps politically uncomfortable – menu of policy options
which would have a significant bearing upon long-term sustainability, and b) linked in to the
Financial Plan, and thus to the budgeting process itself, in a more direct way. 
One way of addressing these issues would be to present the Sustainability Report in the
future not as a purely Federal Ministry of Finance publication, but as a whole of government
publication in which line ministries are expected to present policy responses (as is already
the case in the sustainability chapter of the annual Stability Programme), or at least policy
options, that would have a bearing upon long-term sustainability. By presenting the Report
at a suitable juncture in the annual budget process – for example in March (as the Federal
Ministry of Finance did with the 2014 interim update), alongside the government’s technical
Benchmark Decision, or shortly thereafter alongside the annual Stability Programme – the
way could be opened for these policy messages to have an impact on the budget process
itself before the draft budget is presented to parliament in August.
The option of conducting the long-term sustainability analysis alongside a periodic
spending review process, and integrating the process within the mainstream of fiscal
policy-making via that route, is discussed in Box 10 above. 
Separately, it should be noted that the MOF also produces a Subsidy Report which
assesses the full extent and nature of the state’s support for various sectors.

---

BUDGET REVIEW: GERMANY
OECD JOURNAL ON BUDGETING – VOLUME 2014/2 © OECD 2015