Mr. Peichl, we have a budget crisis in Germany. The Union and FDP would prefer to solve this with savings in social benefits. You have done a lot of research on inequality. From your perspective: Do the demands worry you or are they justified?
Andreas Peichl: It’s a political question of what you want to achieve. From an economic point of view, however, I think it is completely the wrong approach to save money on the most vulnerable in society. The lever is significantly smaller than many people like to pretend.
Why?
Let’s take the debate about citizens’ money…
…Markus Söder called in Stern to “postpone the citizen’s benefit increase and start it all over again”…
Yes. And at first glance he certainly has a point when he questions why the increase next year is so high at 61 euros. But that’s easy to explain, and if you go into the details, you quickly understand why it can’t be moved or reset so easily.
Namely?
The increase has two reasons: Firstly, the high inflation last year. And on the other hand, a change in the calculation of the subsistence minimum, which affects not only the citizen’s allowance, but also the child allowance, and the child allowance or the basic allowance in the income tax. The calculation is carried out on a legal basis and is based on data that is only collected every five years – microdata from the income and consumer sample. In the meantime, the values are updated based on a mixed index of 70 percent inflation and 30 percent net wage development. The federal government cannot simply ignore this approach.
But inflation has recently fallen.
Yes, and that would be the only point where one could start in the short term. However, instead of an update, where you currently take twice the high past inflation rate for the adjustment, you would have to use an inflation forecast. However, this would require the calculation rules to be adjusted again. The calculation in the summer certainly assumed that the inflation rate would be higher in the long term. If one were to recalculate again using a current inflation forecast instead of updating, there would definitely not be a 61 euro increase. But it wouldn’t be the case that zero euros would come out.
Rather?
Difficult to say off the top of my head. We are talking here about savings of a maximum of 1 billion euros. And that certainly doesn’t fill the hole of 17 billion euros.
In other words: the German budget is not healthy because of citizens’ money?
No, definitely not. You have to approach completely different pots.
Where could savings be made minimally invasively and in the short term? Is that even possible when it comes to social spending?
Minimally invasive and social policy are somewhat mutually exclusive. The short term is the more crucial point. For me, the subsistence minimum is out of the question because it is protected by tax and constitutional law. The same applies to the abolition of the spouse splitting or the commuter allowance. Although this would lead to additional revenue, both are at least partially protected by the constitution.
What about company car privileges?
Yes, that would be easier to implement because there are no constitutional concerns.
Where else could we start?
In social and financial policy, most likely with taxes. If the government is short of money, it can increase income tax or VAT. Of course, this leads to big discussions, like now in the catering industry. But formally it is a relatively easy option.
This would particularly affect the working population. Can that be fair?
Well, if you abolish parts of the reduced VAT rates, it would affect everyone’s consumption.
It is said that we don’t have an income problem, but rather an expenditure problem. These were two examples of additional income. Where could you save on expenses?
You’ll immediately be able to retire. Pension at 63, basic pension, mother’s pension – these are all topics that could be discussed in view of the increased life expectancy. We may have lived beyond our means in the past. So that would be the right adjustment screw.
But nothing that can be started in the short term, right?
Yes, these are cost blocks that we have built up over ten years and that could not be ended with the stroke of a pen.
One suggestion is also to save on the costs for refugees – especially from Ukraine. Sensible?
This quickly brings you back to the topic of citizens’ money. Regardless of this, it could be discussed whether we are providing the right incentives for refugees to work.
And do we have them?
Oh well. First of all, I don’t believe that citizen’s money stops people from working – with the exception of black sheep. Work makes you happy and gives many people meaning. The problem is the credit rules and transfer withdrawal rates – i.e. how much income is credited towards the citizen’s allowance. This is sometimes too high, which is why additional work is often not worth it when making a transfer claim. But then again this has several levels.
Namely?
From credit rules you quickly get to bureaucracy and sanctions. Many employment agencies are only concerned with calculating entitlements and not with their actual job description: arranging jobs. However, with support and placement, refugees can be integrated into the labor market much better than through sanctions. Nevertheless, we have to ask ourselves why refugees in other countries are integrated into the labor market much more quickly.
Do you have an explanation for this?
In Denmark, for example, where relatively speaking there are twice as many Ukrainians working as in Germany, English is spoken more frequently in companies. There is also less protection against dismissal and employee participation than in Germany. The biggest problem, however, is the recognition of qualifications. There are absurd bureaucratic hurdles in Germany.
In short: the problem is the bureaucracy, not the incentive structure itself?
Yes, although unfortunately the incentives are such that only a little bit of work is worthwhile – for example in mini-jobs. If, after a certain exemption limit, I am only allowed to keep 20 percent of my salary, I will only work up to this exemption limit and have the rest paid out to me as a transfer. On the contrary, the system even creates an incentive to work illegally. This doesn’t show up in the statistics. Many people receive citizen’s benefit and work illegally on construction sites or as cleaners. In my opinion, not enough is being done about this. Instead we struggle with bureaucracy.
Nevertheless, would that be a point to achieve additional income and savings at the same time?
Yes of course, but more long term. Sanctions and incentives for the unemployed do not come close to filling the budget hole of 17 billion euros.
How would you fill the hole?
The most important question must be: What can I do without slowing down growth? There are ways to reduce transfer withdrawal rates so that people earn more income through work. This would reduce the government’s spending side and increase revenue. When it comes to revenue, I would radically limit the numerous exceptions to VAT – perhaps even increase the entire VAT by one or two percentage points. We are still at a moderate rate on average in the EU. Secondly, I would go to income tax – and see what you can deduct and whether some so-called climate-damaging subsidies are really necessary. That would perhaps even allow scope for self-financing tax rate reductions. And thirdly, I would take back some pension gifts from the past few years. We have to face the reality that people are getting older. So we also have to work longer.
Note: This interview first appeared on Capital.de.
