Lower house approves key elements of Agenda 2010 reforms

In October 2003, the lower house of the German parliament narrowly approved most of a package of social and labour market reforms which forms part of Chancellor Gerhard Schröder’s 'Agenda 2010' programme. These include bringing forward major tax cuts, reductions in both unemployment benefits and tax breaks, a reorganisation of the Federal Labour Office and a reform of local authority finances. However, in November the reform package ran into problems in the upper house of parliament and was referred to a mediation committee.

On 17 October 2003, the lower house of parliament (Bundestag) narrowly backed the bulk of a package of contentious social and labour market reforms that had been proposed and supported by the governing Social Democratic Party (Sozialdemokratische Partei Deutschlands, SPD) and the Alliance 90/The Greens (Bündnis 90/Die Grünen). Essentially, the legislation is comprised of two major parts: tax changes; and the 'Hartz III' and 'Hartz IV' laws, which take their names from the special independent governmental commission that was set up in 2002 to review the situation of the country’s labour market and propose changes (DE0209205F) The legislation is part of Chancellor Gerhard Schröder 'Agenda 2010 ' programme (DE0303105F), which is a bundle of interconnected reform measures, including sweeping changes to Germany’s deficit-ridden health and pension systems. The government hopes that the various elements of the Agenda will form a 'virtuous circle' and have a mutually beneficial effect in stimulating the economy.

The Hartz III bill provides for a major reorganisation of the Federal Labour Office (Bundesanstalt für Arbeit, BA). It aims to remodel BA along the lines of private job placement agencies, renaming it the Federal Job Agency (Bundesagentur für Arbeit). The new agency will be responsible for managing unemployment benefits and for finding job placements for unemployed people. The agency will also have the power to cut by 30% the benefits of people who refuse the jobs offered to them, a very controversial issue.

At the moment, there are three levels of unemployment and welfare benefits that apply to unemployed people: unemployment benefit, unemployment assistance and social assistance. Hartz IV calls for unemployment assistance and social assistance to be merged into a new benefit called 'unemployment II', aimed at spurring those without a job into action. People will still be entitled to their old-style unemployment benefits - renamed 'unemployment I'- based on a percentage of their previous wage income, for their first 12 months of joblessness. However, those unemployed for more than 12 months (18 months for those aged over 55) will receive the flat-rate unemployment benefit II after a transition period; this will be significantly less than unemployment I benefit in the first year. It will also be less than the current income-related unemployment assistance. There will also be a tightening of rules governing the acceptance of reasonable job offers. Job offers are to be deemed reasonable if the pay scale corresponds to wages normally paid for the kinds of work in question.

Implementation of parts of a previously approved tax reform, worth about EUR 15.6 billion, have been brought forward to 2004 from 2005, as originally planned. The reform will change the progressive income-tax rate from 19.9% to 15% at the lowest level, and from 48.5% to 42% at the highest level. The bill on this issue also includes some tax subsidy reductions. For instance, the bill proposes eliminating the home-ownership allowance, and reducing the commuter tax allowance. Another tax reform bill seeks to reform local government finances by greatly increasing local government tax revenues, as German cities are running at a record deficit in 2003. The current 'trade tax' is to be transformed into a local business tax that will also apply to the incomes of freelance professionals and other self-employed people.

On 7 November 2003, parts of Chancellor Schröder’s reform package met with resistance in the upper house of parliament (Bundesrat), which is dominated by the opposition, and this has delayed the decisions of the lower house. The upper house voted to refer the main government plans to a mediation committee. Amongst the Agenda 2010 bills, those designed to reduce tax breaks, to merge unemployment and welfare benefits in order to reduce the state’s expenditure and to improve incentives to work, and to reform the trade tax laws in order to pump money into Germany’s cities have, at the very least, been temporarily delayed. Some of them may, indeed, be completely rejected. The mediation committee, which is dominated by the opposition Christian Democratic Union (Christlich Demokratische Partei, CDU) and Christian Social Union (Christlich Soziale Union, CSU), said, in particular, that passage of the tax-break reforms was dependent on a relaxation of Germany’s recruitment and dismissal laws. The mediation committee, made up of parliamentarians and representatives from every party, has until 17 December to debate the proposed changes. If the bills passed by the lower house of parliament are not approved by 19 December, they cannot become law on 1 January 2004.

Most trade union leaders - including those of the Confederation of German Trade Unions (Deutscher Gewerkschaftsbund, DGB) and the German Metalworkers' Union (Industriegewerkschaft Metall, IG Metall) - reject (parts of) the Agenda 2010 programme. On the other hand, employers’ associations, in general, support the legislation as first steps in the right direction, even if problems remain. The International Monetary Fund (IMF) welcomed the Agenda 2010 reform package in its annual report on Germany published on 6 November 2003, and called for the package to be implemented.

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