Berlin has no other alternative but to continue its strict policy of consolidation. Despite the fact that cost-cutting measures greatly curb regional economic trends, the DIW Berlin advises strict compliance with these measures in its current weekly report 10/2002. However, no further cuts should be made in the budgets for education, science and culture, as these sectors have a promising future and stimulate economic demand and growth in Berlin. Financial resources, however, have to be used in a more innovative and efficient way than they have been up until present: the DIW Berlin considers the foundation of private universities to be an example of innovative funding.
Berlin's economy is far behind those of other cities. Its GDP per capita is at best only half as high as that of Munich, London or Brussels. The DIW Berlin, however, comes to the conclusion that the industrial sector in Berlin has begun to turn around. For the first time in years production has increased: at 1%, it has almost reached the federal average.
The rise in the number of unemployed has come to a standstill: one fourth of all industrial jobs have been axed since 1995. Berlin could also improve on its position in some branches of the national service sector - an important pillar of a city's economy. The DIW Berlin points out that the city's strength lies in the effective combination of household and business related services such as linking advertising, the media and culture or fairs, congresses, hotels, sport facilities and culture.
Even if the strict cost-cutting measures are complied with, the budget deficit will probably reach 2,6 billion euro by 2005, 12% of the total household budget. With an debt of 16 000 Euro per capita, Berlin will have the greatest debt burden among all federal states. The cost of servicing this debt will increase dramatically. If no interest had to be paid, then expenditure could be reduced by 5%. Even if the Federation and the Länder support Berlin in its effort to reduce debt, an idea the DIW Berlin strongly encourages, the city will still have to cut back on its supply of public goods for years. This also means that 10% of all jobs in the public sector will have to be cut. Furthermore, the promotion of housing construction has to be stopped.
Berlin's labour market policy should move away from job creating measures, local job creating initiatives (bezirklichen Beschäftigungsinitiativen) and a Third Labour Market. All these measures will not reduce the pressure on the Berlin labour market in the long term. The DIW Berlin instead suggests the introduction of labour cost grants or social security contributions subsidies. The DIW Berlin approves of the programmes aimed at bringing people on income support back to work that have already been implemented.
Berlin must cut back its financial expenditure to encourage economic growth. However, Berlin could without cost limit regulations to a bare minimum and thus create a favourable climate for investment, which surveys carried out by the DIW Berlin found to be unattractive at present. Complicated and lengthy procedures and the number of state authorities involved in the decision-making process are also criticised. The DIW Berlin, therefore, calls for the foundation of a chamber of commerce which has precedence over other authorities.
The DIW Berlin stresses the need of a major airport for the region Berlin-Brandenburg, yet, it considers renegotiations to be necessary. The project must be put up for tender once more or be financed by the public sector.