The inflated German welfare state - myth or truth?

In view of tight budgets, the question is being raised as to whether Germany overspends on social benefits. Is the German welfare state too inflated? A study by the Macroeconomic Policy Institute (IMK), which has close ties to the trade unions, investigates this question. Sebastian Dullien and Katja Rietzler disprove this using data from the Organization for Economic Cooperation and Development (OECD). Since 2022, only in the Netherlands and Greece has the increase in public welfare spending been lower than in Germany. According to the OECD, net social spending spending as a proportion of gross domestic product (GDP) in France and the USA is also significantly higher than in Germany.

Moderate increase

In 2019, the social budget in Germany exceeded the EUR one trillion mark for the first time. Since then, welfare spending has continued to reach new record levels. The problem with this argument is that the "records" for nominal amounts of money are not very meaningful. The report rightly points out that pensions, for example, are linked to wage trends. Rising wages therefore lead to an increase in pension payments. In order to determine whether welfare spending has increased, the price-adjusted increase must therefore be taken as a basis. According to OECD data, public welfare spending in Germany rose by 26 per cent between 2002 and 2022. Compared to OECD countries, this is a moderate increase. New Zealand, Iceland, Ireland, Poland and Luxembourg, for example, recorded an increase of over 100 per cent in this period, and the increase was over 50 per cent in a further 17 OECD countries.

Share of GDP remains the same

When considering whether Germany can afford this increase in welfare spending, it is worth taking a look at the trend of welfare spending as a proportion of GDP. According to OECD figures, the share of public welfare spending in GDP remained constant at 25.6 per cent between 2002 and 2019. As a result of the COVID-19 pandemic, this rose temporarily to almost 30 per cent, but then fell again to 26.7 per cent in 2022. The temporary pandemic-related increase corresponds to the average trend in the OECD. If we compare the share of public and private net expenditure on social issues in GDP with the current figures for 2019, France and the United States have the highest share at around 30 per cent. Germany, Belgium and the Netherlands make up the group with the next highest shares, at just over 25 per cent. But even in Switzerland, the share of net welfare spending is not significantly lower at 24 per cent.

International comparison

However, the figures say nothing about whether welfare spending in Germany is particularly high or low. When comparing welfare spending with other OECD countries, it is not enough to look only at public welfare spending. In countries such as Switzerland, the Netherlands and the United States, private health insurance is predominant and is largely mandatory. The report emphasises that it is irrelevant to the economy as a whole whether you have mandatory private or statutory health insurance. The different tax systems must also be taken into account. The tax treatment of welfare spending varies greatly. The OECD therefore reports net welfare spending as a percentage of GDP.

The amount says nothing about their effect

In its comparative analyses of welfare spending, the OECD emphasises that more welfare spending by private institutions and tax regulations that lead to greater equality between spending levels across countries does not necessarily mean more redistribution and solidarity. Low-income employees often have no access to private social benefits at all. Moreover, tax advantages generally benefit the wealthy more than low earners.