Redesigning the Welfare State: Germany’s Current Agenda for an Activating Social Assistance, by Hans-Werner Sinn et al

Edward Elgar, Cheltenham, 2006, xi + 204 pp., hardback, 1 84720 077 X, £55.

This careful and detailed study of the German welfare state from the Ifo Institute for Economic Research in Munich correctly locates the current European welfare state crisis as a symptom of a globalization which, by bringing workers from elsewhere to compete with Europe’s low-skill workers, and by moving manufacturing industry to countries with lower wages, increases unemployment amongst low-skill workers in developed countries and puts pressure on welfare budgets.
This book charts the growth of unemployment amongst low-wage, low-skill workers in Germany, and describes the current German benefits systems as

‘providing a [fairly high] general minimum level of income that strongly discourages benefit recipients from taking up work …. Welfare recipients are therefore condemned to remain inactive, and it is virtually impossible for them to free themselves based on their own capabilities and resources. This is completely at odds with the philosophy of a market economy’ (p.4).

The authors propose a system related to ‘income potential and a willingness to earn income’ (p.4) composed of a ‘wage tax credit’. This, they say, coheres with a policy which seeks redistribution and also leaves ‘the willingness of citizens to work affected as little as possible’ (p.39). The inspiration for the tax credit proposal is current US, UK and French policy (pp.48ff).

Germany’s current reforms are evaluated in relation to the Institute’s proposal, and the comparison reveals that marginal deduction rates would be generally lower with the Ifo scheme, though still high at 80% for a variety of family types and across a broad range of incomes. Such continuing high marginal withdrawal rates should surely be a concern, as should be the complex administrative systems relating to tax credit schemes. The authors really ought to have paid some attention to UK experience of administrative errors and low take-up of tax credits.

Tax credits don’t, of course, enable a welfare system to escape from the problems of means-tested benefits. Tax credits are themselves means-tested. They might increase take-home pay for the lowest earners, but, because they are withdrawn as earned income rises, they push the problem further up the incomes spectrum by imposing a plateau so that, in the British system, many family types must earn £20,000 p.a. or more before they can escape high withdrawal rates.

UK Child Tax Credits get a section of the text to themselves (pp.54ff), but Child Benefit does not. This is a pity, for anyone wanting to reduce both means-testing and the difficulties many families face if workers take low-paid jobs, really ought to be studying the UK’s Child Benefit, as the graph on p.57 shows.

A reform of Germany’s welfare state, or of any other welfare state, undertaken by providing a non-mean-tested income floor, would increase the system’s efficiency and would reduce poverty. Such a reform would cohere with precisely the kind of social policy which the authors of this book want to see evolve. We very much hope to see another book exploring this possible reform of Germany’s welfare state.