Social Benefits Under Review: German Budget Woes Deepen after Court Orders Welfare Revamp

Germany's highest court has ordered the government to revise its welfare benefit system for the long-term unemployed and their families in a landmark ruling that could cost the government billions of euros. The ruling may put further pressure on an already taxed budget.

Labour minister Ursula von der Leyen has pledged to implement revisions to the welfare system. Zoom
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Labour minister Ursula von der Leyen has pledged to implement revisions to the welfare system.

Germany's top court has ordered the government to revise the biggest welfare reform since World War II in a decision that could lead to higher benefit payouts and put added pressure on the budget this year.

The so-called Hartz IV benefit system for the long-term unemployed was introduced in 2004. It was deeply controversial because the payouts were low. The idea was to boost the economy by encouraging jobless people to find work and reducing the cost of Germany's welfare system.

Named after Peter Hartz, the former Volkswagen executive who devised the welfare reforms, the Hartz IV reform has become synonymous to many in Germany with poverty and social decline. More than 6.5 million people receive Hartz IV payments, the basic rate of which is currently €359 per month ($493) for an adult.

The rate for children stands at between 60 and 80 percent of that sum. Other entitlements covering rent and purchases of household are subject to means-testing.

Opaque Calculations

The system was introduced by the center-left government of Chancellor Gerhard Schröder, and is one of the main reasons for the decline of popular support for the Social Democrat Party ever since, even though the reforms have been credited with making the economy more efficient.

Three families had mounted a legal challenge against the Hartz IV system and the Federal Constitutional Court ruled on Tuesday that the calculation methods for benefits weren't transparent or realistic enough. The families had argued that the benefits didn't take sufficient account of special requirements for children such as new clothing.

The judges did not say if benefit payments will now have to be increased across the board, but payments for children in particular may be raised. The court ruled that government must revise the system this year so that the necessary changes can come into force on Jan. 1, 2011.

The German budget deficit this year is already projected to rise to 5.5 percent of GDP in 2010, well above the EU ceiling of three percent, as a result of the economic crisis and the government's stimulus packages. The court's decision could end up bloating the deficit even more, and may limit the scope for planned tax cuts.

Benefits for Children Likely to Rise

The government responded by pledging to make the necessary changes in time. "We've been given a lot of homework to do," said Labor Minister Ursula von der Leyen.

The budget spokesman of the the conservative Christian Democratic Union in parliament, Norbert Barthle, said it wasn't clear yet whether there will be a net increase in Hartz IV payments.

But Hans-Peter Friedrich, the parliamentary group leader of the Christian Social Union, the Bavarian sister party to the CDU, said benefit payments for children were likely to increase. The court's ruling is likely to heighten tensions within Chancellor Angela Merkel's center-right coalition over planned tax cuts.

The pro-business FDP, the junior partner to the FDP, is insisting that tax cuts go ahead despite current budget constraints, but leading conservatives are skeptical that further cuts are feasible.

cro -- with wire reports

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