A sharp increase in the costs of compliance for businesses

Professor Müller, everyone is talking about reducing bureaucracy and easing the burden on businesses. Both are generally seen as a prerequisite for more economic growth. Where do we stand in Germany at the moment?

Steffen Müller: I believe that German politics has clearly recognized that more and more voices are calling for debureaucratization and relief for businesses, citizens and public administration. At least these declarations of intent can be found in almost every political position. Unfortunately, however, there is still a great lack of implementation.

What do you think and how do you determine this?

We have taken a look at the latest data from the Regulatory Control Council, which is responsible for analyzing the follow-up costs of laws and presenting the costs of bureaucracy. If we look at how the so-called compliance costs – i.e. the follow-up costs of laws and the costs of bureaucracy – for companies have developed in the current legislative period, we see something surprising: The most expensive regulations were introduced by the Federal Ministry for Economic Affairs and Energy (BMWi, Alliance 90/The Greens) and the Federal Ministry of Labour and Social Affairs (BMAS, SPD) – the two core ministries when it comes to the economy and employees. Although it was precisely here that relief was to be provided, it was precisely here that additional burdens were created – through one-off and running costs.

And why is that?

The increase in compliance costs can be attributed to several factors. For one thing, numerous new laws and ordinances were introduced during the current legislative period that entail a considerable compliance burden for companies. A prominent example is the “Ordinance to Secure the Energy Supply via Measures with a Medium-Term Effect” of August 2022, which caused one-time additional costs of 5.5 billion euros. Even more expensive was the “Act Amending the Building Energy Act and Several Ordinances for Converting Heating Supply to Renewable Energies”, which resulted in one-time costs of €12.5 billion and annual costs of €3.6 billion. The adjustment of the minimum wage by the BMAS in 2022 also led to annual compliance costs of €5.7 billion for businesses. These are all new burdens involving large sums of money. However, caution is also required when evaluating the figures. If the responsible minimum wage commission had raised the minimum wage, and not the BMAS, additional costs would also have been incurred by companies – but to a lesser extent.

Are there also measures that have led to a reduction in the burden on companies?

Yes, the Federal Ministry of Finance (BMF, FDP) has introduced regulations through the Growth Opportunities Act of August 2023 that will relieve companies of 1.7 billion euros annually. These measures show that there are also efforts to reduce the burden. More recent initiatives, such as the growth initiative from July of this year, have yet to show whether they can deliver on the promised relief.

Why do you consider this relief to be important? The German economy is not in a deep crisis at the moment...

...but it is not looking rosy either. I would remind you of the current rise in unemployment figures, slightly negative growth and insolvency figures for partnerships and corporations at an exceptionally high level. In such times, every effort should be made to stimulate growth and, where possible, enhance potential growth. Increasing the bureaucratic burden does the opposite: it can impair the competitiveness of the German economy in the long term. High compliance costs can inhibit investment and place an excessive burden on small and medium-sized companies in particular. This could lead to a decline in innovative strength and international competitiveness.

What measures could be taken to reduce the bureaucratic burden?

One reason for the high costs is the high density of regulation in Germany. My impression is that our country is ultimately tying its own hands in the attempt to eliminate or mitigate as many economic risks as possible through regulations and laws. I would like to see policymakers boldly communicate that Germany urgently needs to change after long years of continuity and calm, which were ultimately also bought by deferred investments and reforms. This is not just about the ecological transformation of the economy. It is also about the imminent labor shortage in the country and, at the same time, changing geopolitical conditions that will particularly affect Germany due to its enormous economic ties, especially with China.
The key point is that it will be difficult to shape these changes with tied hands. I don't think it's a question of people's drive, but you also have to make changes possible. The World Bank's Doing Business indicator, for example, clearly shows how expensive it is to start a business in Germany compared to other countries. On the one hand, we need coordinated guidelines for economic activity instead of a patchwork of individual measures. This means that we need to systematically review and streamline existing regulations. Furthermore, when new laws are introduced, the compliance costs should be weighed up even more carefully than before and kept to a necessary minimum. The Regulatory Control Council plays an important role here by monitoring and evaluating the follow-up costs of new regulations.

So the Regulatory Control Council is not fulfilling its intended role?

The Regulatory Control Council performs a very important function in monitoring and evaluating the costs of legislation. However, I do not have the impression that the results of the Regulatory Control Council are known to the general public.

The questions were asked by Wolfgang Sender.