The German Ministry of Finance announced last month that it was commissioning an evaluation of the federal government's tax subsidy programs. The evaluation will determine if there are rational goals for these programs, as well as their effectiveness and efficiency in achieving these intended goals.
 
The announcement coincided with the release of the biannual government report, which as in previous editions examines the trends in federal direct subsidies and tax expenditures. It found that federal direct subsidies have been on the decline since they peaked at the 10 billion euro level in 2000, and were projected to total 5.9 billion Euros in 2007. Federal tax expenditures have declined slightly since their 2005 peak of 17.4 billion euros, with expenditures in 2007 expected to reach 16.7 billion euros.

The biannual subsidy report gives a broad picture of all federal subsidies and it highlights data for the 20 largest direct subsidy and the 20 largest tax expenditure programs. It is on the 19 largest tax expenditure programs that the commissioned evaluation will focus. (One of the original 20 tax expenditure programs highlighted in the report, a home building program whose predecessors were designed after World War II, was recently scrapped by the government).
 
Three organizations have been contracted by the Ministry of Finance to conduct the evaluation. Led by the Cologne Center of Public Economics (FiFo, by its initials in German), the group also includes the Mannheim-based Centre for European Economic Research and the international consulting firm Copenhagen Economics.
 
Subsidy Watch spoke with FiFo Managing Director Michael Thöne* about the upcoming evaluation. According to Dr. Thöne the evaluation will first try to establish the rationale behind the tax expenditures. This will be no easy task, he admits, given that many of these measures have been in place for decades. Over the years the original objectives behind these measures may have been lost, he explained.
 
Once goals are established for each program, the evaluation will determine whether these goals are still rational under the principles of the modern German economy.
 
Finally, Dr. Thöne and his colleagues will measure the effectiveness and efficiency of the programs. Effectiveness concerns how well a program attains its intended goals. The efficiency of a program measures the programs value (impact on goals) compared with the money spent. Taken together the two measures are intended to help policy makers make informed decisions about whether a subsidy program is doing what it was designed to do, and doing it at a reasonable cost to the taxpayer.
 
The evaluation is expected to be concluded by the middle of next year. Given the Ministry of Finance's public announcement of the evaluation, the results should be made public shortly afterwards.
 
*Michael Thöne is currently working to apply the GSI's new model template for WTO subsidy notifications to Germany.
 
For more information on the biannual report on subsidies including a copy of the report in German, please visit the Ministry of Finance's website by clicking here.
 
For more information on the organizations conducting the evaluation of federal tax exemption programs visit their websites at:
Cologne Center for Public Economics
Centre for European Economic Research
Copenhagen Economics