How (un)capable is the German state?

The German Bundestag has more MPs than ever before. The parliament elected in 2021 has 736 members. That is almost two dozen more than in the previous legislative period and almost 100 more than in 2013. Even then, the Bundestag was one of the largest parliaments in the modern world. The legally stipulated target number was 598 until March 2023, but this was increased to 630 with the electoral law reform in March 2023, whereby the number of federal mandates is to be reliably limited this time by reorganising the allocation of so-called overhang and equalising mandates.

In addition to the Bundestag, the entire federal administration is growing. The report by the Bundesrechnungshof to the Budget Committee of the German Bundestag in accordance with Section 88(2) of the Federal Budget Code (BHO) from 5 May 2022, entitled "Increase in posts and job shortages in the federal administration" shows that over 30,000 new posts were created in the federal administration in the 19th electoral term. This corresponds to an increase of 12% compared to the job target from the beginning of the legislative period in 2017.¹

In principle, the strong growth of the public sector would be justified if the associated additional expenditure could be covered by efficiency gains in the state apparatus. However, this does not appear to be the case. There are good reasons to claim that the bloating of the state is often accompanied by efficiency losses and performance problems. This not only harms the state sector itself, but also weighs on the entire economic system.

Although the underlying performance problem of the state is widely recognised, the public debate about it is very fragmented. This is not only due to the fact that the responsible decision-makers have insufficient interest in changing the status quo, but also because the data required to assess the state's performance is rudimentary and confusing.

In contrast, interest in the question of how well the German state is doing should be very high. After all, excessive state bloat not only means a tax burden for taxpayers. There are at least two additional negative side effects. Firstly, government inefficiencies create barriers to entrepreneurial activity in the private sector. Secondly, the associated increase in expenditure is often accompanied by a further increase in public debt, which ultimately undermines intergenerational equity and therefore sustainability. The aim of this study is therefore to translate the patchwork of data and facts on government performance into a coherent picture.

Government performance - a multidimensional concept

Just as an ambitious athlete utilises his available resources to improve his performance in order to achieve the best results, every company - whether private or state-owned - should also be interested in improving its performance in order to achieve its goals. However, while the performance of an athlete can be measured using clearly defined benchmarks such as time, distance or height, the measurement process for companies and even more so for the state is much more complex. However, it can be approximated with budget efficiency, productivity and performance. At the end of the consideration of these three characteristics, meaningful conclusions can be drawn about the value for money of the state and thus about how the state can best utilise its resources to generate added value and deliver desired results. This analytical approach is summarised in Figure 1.

In general, efficiency is a measure of how well the available resources are utilised to achieve set goals. The focus is on the question of how sensibly the budget is used to acquire inputs at a favourable price. A production process is efficient if production costs are minimised while output remains constant. The resulting budget efficiency can be influenced relatively easily and quickly in the public sector, for example through cost savings for personnel.

Although conceptually efficiency appears to be clear and precise, there are some uncertainties about its measurability, particularly due to the need to consider multiple inputs and outputs simultaneously. One of the most advanced methodological efforts to develop a metric of public sector efficiency is the so-called Data Envelope Analysis (DEA). The aim of this analysis is to measure the relative efficiency of different decision-making units by comparing each unit with a hypothetical unit – a reference group – formed as a weighted average of a set of efficient units.² However, the method is purely mathematical, which entails several problems, such as the lack of attention to the statistical significance of the underlying input-output relationship. In addition, efficiency calculations using this method are not carried out across the board. For these reasons, the concept of productivity appears more attractive.

Productivity addresses thequestion of how much output each input unit produces. It is usually measured by the relationship between the results achieved (output) and the resources used (input).³ An improvement in productivity can therefore be achieved either by an increase in output, a decrease in input or by both processes simultaneously. Although productivity gains should generally be beneficial, they are particularly desirable when they result from quality improvements in the manufacturing process.⁴

Although measuring productivity seems very intuitive, its practical implementation is anything but trivial, especially for the public sector. The main problem lies in the correct recording of public outputs. This is not only because no market prices can be observed for most public services, but also because the comparable transactions on these services are recorded differently. This heterogeneity leads to difficulties in separating quantity and quality fluctuations and in determining unit prices for comparable services. Due to these difficulties, statistical offices in many countries have used the so-called input method to measure output, in which the measurement of the output volume is based solely on the recording of the inputs used for this purpose. The direct consequence of this method is that it is not possible to calculate productivity, as input equalling output always implies a ratio of one between the two. The Federal Statistical Office has therefore made a simple assumption of an annual increase in productivity in the public sector of 0.5%.

Due to this problem, alternative methods of so-called direct output measurement have been developed, whereby the quantities are recorded in an aggregated output indicator using appropriately selected weights. This method is particularly suitable for individually attributable services - i.e. those that are provided directly to individual consumers, such as education. Measurement according to this method of collective services, which are not provided for the individual but for the general public and where an individual transaction between the state and the individual cannot be observed, is problematic.

In this context, the European Commission decided in 2002 to categorise statistical methods according to an A/B/C scheme, whereby A methods are classified as the most suitable, B methods as permissible and C methods as fundamentally impermissible. Accordingly, the input method was classified as a C method and its use was declared inadmissible from 2006 - with the exception of collective benefits. These recommendations were partially implemented in Germany in the course of the 2005 revision of the national accounts.

Ultimately, however, not everything that is achieved efficiently or productively necessarily leads to the desired results. Against this backdrop, it can be helpful to look at the concept of performance, which focuses on the impact of the results achieved and therefore scrutinises the effectiveness of the measures taken with regard to the achievement of objectives. While the focus of productivity is on the output and therefore more on the "what", the outcome - i.e. the "how" - is more important for performance. For example, it can be important to consider a hospital's activities not only in terms of the number of operations performed per input unit, but also in terms of their success. Similarly, while bureaucracy is a necessary part of running a state, especially in complex societies, an overly complex and cumbersome bureaucracy slows down decision-making, prevents effective communication and the achievement of goals. An effective government should therefore endeavour to maintain a balanced bureaucracy that combines the need for administration and rules with the efficiency and flexibility to meet the needs of citizens.

What does the data say about the performance of the German state?

The multidimensional conceptual framework for analysing the performance of the state requires a broad view of the data representing the three underlying concepts.

Efficiency

When it comes to budget efficiency, the Federal Ministry of Finance established the spending review process at federal level in 2015. Since then, spending reviews have been part of the government's internal procedure for drawing up the federal budget. However, the review is based on different priorities each year. For example, the final report from 2022 examined the link between sustainability goals and the 2021/2022 federal budget. A year earlier, on the other hand, the BMF experts looked at "Further training, re-entry, business start-ups". The constant change of focus prevents from providing a consistent and uniform picture of the development of budget efficiency over time. Furthermore, this is an internal government procedure, which means that only a final report without a comprehensive and consistent data analysis is available to the public. For example, the 2022 report is limited to a handful of suggestions for improvements to measure the effectiveness and efficiency of achieving the sustainability goals, among which, for example, a vague formulation to "consider the gender impact (...) as a prominent goal" (BMF 2022, p. 3) has found its way into the report.⁵

Productivity

The measurement of government productivity is the most advanced. The German Council of Economic Experts also regularly monitors productivity trends in its annual report. However, the assessment of the public sector has so far been completely missing. In contrast, the Federal Statistical Office calculates three productivity indicators based on the national accounts - labour, capital and multi-factor productivity - for the public service, education and health sectors, among others.⁶

Labour productivity is the best-known single factor productivity measure. It is calculated as the ratio between output - usually measured by the price-adjusted gross value added (GVA) for individual economic sectors - and labour input.⁷ The latter can be measured by the number of people employed or the number of hours worked. There is a certain consensus that the latter figure is more appropriate - especially for Germany, due to the great importance of part-time and short-time work. However, productivity per employee should be no less important for measuring the performance of an economy because it takes into account the (labour) resources actually available. This rules out artificial increases in productivity through reductions in working hours.

Capital productivity is calculated in an analogous way as labour productivity, whereby the output is set in relation to the capital stock. Multifactor productivity, on the other hand, does not relate output to a single production factor, but to the combined use of production factors, usually labour and capital. The resulting indicator reflects the combined influence of the production factors on output.

The development of labour productivity in the public sector since 1994 paints a sobering picture. While labour productivity per hour worked rose until 2002 (per employee only until 1998), its development since then has been disappointing. Between 2004 and the European sovereign debt crisis (2012), its growth rate averaged 0.3% (-0.3% for labour productivity per person employed). After the European sovereign debt crisis, it shrank by an average of -0.1% annually (-0.5% for labour productivity per employee). In general, a downward trend in labour productivity growth can be observed since the Great Financial Crisis (Fig. 2). This is remarkable in that the public sector employs an ever-increasing proportion of the labour force, which is therefore no longer available to the rest of the economic system. While the proportion of people employed in the public sector as a percentage of the labour force was 20.8% in 1991, it has grown almost uninterruptedly since then, reaching an all-time high of 26.2% in 2023 (Fig.3).

The picture of the past development of capital and multifactor productivity⁸ is more mixed. Between the introduction of the euro and the Great Financial Crisis, there was a prolonged downward trend in both capital productivity and multifactor productivity growth. This was followed by a cyclical but generally weak trend (Fig. 4). On average since 2006, capital productivity growth in the public sector has been 0.1 % and multifactor productivity growth 0 %.

In addition to the most frequently analysed labour productivity, a look at the productivity of public spending can be very useful.⁹ This is measured as the ratio between the gross value added of the public sector and the respective expenditure aggregates. The evidence shows a downward trend in the productivity of public spending since at least 2017, with the productivity of fixed investment spending already declining since 2014 (Fig. 5). It therefore implies that every euro of government spending, which almost doubled in nominal terms between 2004 and 2022 (Fig.5), has been generating less and less added value for several years.

Performance

Neither the performance nor the effectiveness of the state sector is recorded in the official German statistics. In contrast, the World Bank has been measuring the quality of governance in over 200 countries since 1996, which can be used to approximate the development of state performance. Two in particular of the six governance dimensions measured – government effectiveness and regulatory quality¹⁰ – are likely to be suitable for this purpose. In particular, governance effectiveness measures the perception of the quality of public services in policy design and implementation, the degree of independence of the public service from political pressure and the credibility of the government's commitment. Regulatory quality captures the perception of the government's ability to formulate and implement sound policies and regulations that are enable and promote the development of the private sector. The latest developments in the two indices for Germany confirm a downward trend since around 2016, which has already been observed in productivity.

This evidence seems to be reflected in the Forsa survey for the umbrella organisation DBB Beamtenbund und Tarifunion. In 2023, 69% of survey participants considered the state to be overburdened in terms of fulfilling its tasks and solving problems - almost 30% more than in 2020 (Fig. 7).

One explanation for the declining effectiveness of the state in the public perception may lie in the high and rising costs of bureaucracy. Bureaucracy per se does not have to be a bad thing if it implies carrying out necessary administrative activities. Nevertheless, bureaucracy is often perceived as burdensome because it leads to high costs and a considerable amount of time for those affected due to an excess of regulations. Compliance costs are recorded to measure the impact of legislation and the associated time and material cost burden. The Federal Government is obliged to determine the change in compliance costs resulting from the amendment of the legal provisions.¹¹ A distinction is made between ongoing (annually occurring) and one-off compliance costs (conversion costs) and the two cost categories are measured for three norm addressees - citizens, businesses and the administration.

On average between 2012 and 2022, compliance with new laws resulted in an additional annual burden for businesses of €863 million for annual compliance costs and €2,375 million for one-off compliance costs. The trend in administration is similar: the average annual burden in the same period was €774 million for annual compliance costs and €1,710 million for one-off compliance costs. The category of one-off compliance costs in particular is causing continuously higher costs for business and administration (Fig. 8).¹²

Conclusion

The data basis for measuring the performance of the German state is limited and fragmented. There is huge potential for improvement, particularly when it comes to measuring budget efficiency. The measurement framework currently used by the BMF for a spending review points to several analytical inefficiencies. Firstly, the constant change of focus topics in the annual reports prevents a consistent assessment of budget efficiency. Rather, it distracts from the actual budget efficiency. The creation of a consistent picture is also made more difficult by the fact that the thematic change of focus requires the responsible working group to constantly adapt. Secondly, the spending review does not produce any concrete and tangible figures that would allow budget efficiency to be monitored over time.

However, the evidence available to date for assessing the quality of service of the public sector indicates that the German state has suffered a decline in recent years. Both the productivity and performance indicators have shown a continuous downward trend since around 2016. This development should be a cause for concern in that it goes hand in hand with an increasing presence and penetration of the state in the economy. In turn, declining government capability represents an obstacle and a burden for the functioning of the private economy.

Unfortunately, the state's difficulties in fulfilling its tasks often lead to calls for an increase in personnel. Alternatively, there are calls for the digitalisation of administration. Although this is urgently needed, it can only marginally increase the productivity of government activity. The fundamental problem is that the state is neglecting its actual area of activity, the creation of a reliable legal framework and public infrastructure for the private sector and is increasingly intervening "creatively" in the economy and society. The state's encroachment into other areas leads to centralised planning and bureaucratisation, which have always been associated with productivity losses for the economy. What is needed is not more government and its digitalisation, but less government. But those in power probably lack the insight to realise this.

¹ The report is available at: https://www.bundesrechnungshof.de/SharedDocs/Downloads/DE/Berichte/2022/stellenschere-bundesverwaltung-volltext.pdf?__blob=publicationFile&v=1

² Farrell, M. J. (1957), „The measurement of productive efficiency”. Journal of the Royal Statistical Society, Series A, 120, 253-90.

³ Output can relate to the production of goods or services as well as to organisational processes such as budgeting or payment.

⁴ Productivity is closely linked to efficiency. However, the correspondence between the two concepts is not perfect. For example, a company can have high productivity but be inefficient in the way its resources are utilised if, for example, output is generated using overtime.

⁵ See BMF (2022), "Final report: Linking sustainability goals with the federal budget", available at: https://www.bundesfinanzministerium.de/Content/DE/Downloads/Broschueren_Bestellservice/abschlussbericht-spending-review-nachhaltig.pdf?__blob=publicationFile&v=3

⁶ Kuntze, P. & Kuckelkorn, B. (2021), „Multifaktorproduktivität in den Volkswirtschaftlichen Gesamtrechnungen“, Federal Statistical Office, WISTA.

⁷ The government's GVA is generated by market and non-market production, with the latter accounting for the lion's share, and is calculated using the input method. Accordingly, employee compensation, other taxes on production less other subsidies and capital consumption are added together. The detailed methodological background to this method was described in detail in Destatis (2022) "National Accounts: ESA 2010 methods and sources for the German GNI and its components", Federal Statistical Office.

⁸ Multifactor productivity is reported by the Federal Statistical Office exclusively in annual growth rates

⁹ For a detailed analysis of this, see Gehringer, A. (2023), "Do not overwhelm the state!", Flossbach von Storch Research Institute, available at: https://www.flossbachvonstorch-researchinstitute.com/de/studien/den-staat-nicht-ueberfordern/

¹⁰ These are the composite measures of governance calculated in units of a standard normal distribution with a mean of zero and a standard deviation of one and range from -2.5 to 2.5, with higher values corresponding to better governance.

¹¹ The results on the development of compliance costs are published by the Federal Government in the annual report " Bessere Rechtnutzung".

¹² The new laws also generally result in additional costs for citizens, although these are lower than for the economy and administration. These totalled €68 million for the annual burden and €169 million for the one-off burden.

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