Subsidies always require special justification and regular evaluations of their efficiency and success, because favourable arrangements that benefit one side at the expense of others generally have adverse effects in the long term. For example, by altering relative prices over a sustained period, subsidies can send the wrong economic signals. Competitive firms can be crowded out of the market by subsidised rivals. Furthermore, subsidies pose the risk of creating a dependency culture, or a “subsidy mindset”, with the result that recipients fail to make the necessary adaptations and are less inclined to tackle structural challenges. This can delay structural change and harm economic growth and employment. In addition, using government funds to favour individual sectors or companies for the purpose of achieving social objectives is often viewed by the public as unfair. For this reason, the German government will continue to check whether subsidies that make short-term sense can be replaced over the medium term with market-based solutions that are not dependent on government budgets.
To ensure sustainable public finances over the long term, all functions performed by the state must be regularly reviewed to ensure that they are necessary and all measures that impact public finances must undergo appropriate cost-benefit analysis. The German government follows subsidy policy guidelines that constitute voluntary commitments in connection with its adopted measures; the aim here is to enhance the subsidy system’s transparency, accountability and governance. These guidelines are explained in greater detail in chapter 2 of the government’s most recent report, the 25th Subsidy Report, which was published on 2 September 2015. They stipulate, for example, that subsidies are to be both temporary and degressive by design, and they place a high priority on the evaluation of subsidy policies. The data sheets contained in the subsidy reports provide a transparent overview of the extent to which government financial assistance and tax benefits meet these requirements (see Annex 7 and Annex 8 of the 25th Subsidy Report).
Ahead of the preparation of the most recent Subsidy Report, the Federal Cabinet strengthened the subsidy policy guidelines and supplemented them with additional requirements for subsidies to be subjected to a sustainability impact assessment and generally to a regular evaluation cycle. In adopting the sustainability impact assessment, the Federal Government has underscored its aim of giving greater weight to the sustainability principle in its subsidy policies. The sustainability impact assessment is fundamentally based on the National Sustainability Strategy and focuses on the long-term economic, environmental and social effects of subsidies.