January 21 2011
The tightness of the national budgets in Germany and other European countries as well as in the United States is also reflected in the budgets of the lower levels of government in those countries. In Germany this means not only in the municipalities, which are currently commanding considerable media attention, but also in the Länder or federal states (in the US this applies mainly at the state level). Despite the guarantee of autonomy set out in Germany’s constitution (Basic Law) there is close financial integration both among the Länder themselves and between the Länder and the federal government as well as between the Länder and the municipalities.
One component that is more or less the “core” of these cross-links is the fiscal equalisation system (LFA, in the narrow sense). This aims to even out the differences in financial capacity that arise from differences in revenue-generating capacity. The scale of this equalisation has constantly been a bone of contention between the states since the mid-1960s at the latest. It has also been the subject of disputes brought before Germany’s constitutional court. From an economic standpoint, the issue has remained focused particularly on the issue of how much of a transfer union is still compatible with the proprietary efforts necessary for sound budget policy. The states of Baden-Wuerttemberg, Bavaria and Hesse are currently considering whether they should challenge the current fiscal equalisation system in court again.
Since 1950, substantial sums have flowed from one state to another as direct equalisation payments. By the year 1994 (i.e. before the integration of the east German states into the equalisation scheme) these payments totalled nearly EUR 43 bn no less. Net payers during this period were the states of Baden-Wuerttemberg (BW: EUR 18.3 bn), Hesse (HE: EUR 11.8 bn), Hamburg (HH: EUR 6.4 bn) and North Rhine-Westphalia (NW: EUR 5.6 bn). All the other states received a larger cumulative net amount than they paid in, and only BW and HE paid into the system over the entire period without receiving any funds themselves. Several states were payers in some years and beneficiaries in others. For example, Bavaria (BY) has been a net payer only since 1989 (receiving a net EUR 3 bn on balance up to 1994!), and Lower Saxony (NI) was the biggest net recipient up to 1994 (EUR 15.9 bn).
Since the integration of the east German states into the fiscal equalisation system in 1995 this mechanism has been expanded very considerably especially on account of the weak financial capacity of the new states; this was already a reason for the financially strong states of BW, BY and HE to take the issue to court (where they won their case). The fiscal equalisation system in place since 2005 is valid through to 2019 – as long as an already indicated further lawsuit proves unsuccessful. By far the largest recipient of fiscal equalisation payments since 1995 has been Berlin (BE: EUR 39.4 bn), followed by Saxony (SN), Saxony-Anhalt (ST) and Thuringia (TH). For the net payers, the payments skyrocketed during this period (BY, BW and HE together shouldered about EUR 90 bn in such transfers between 1995 and 2009 alone), whereas the previous recipients (i.e. before 1995) had recorded substantial declines. From 1995 to the end of 2009 there were close to EUR 107 bn in equalisation flows between the states, so the total has risen to nearly EUR 150 bn since 1950. The total payments since 1950 thus exceed the aggregate debt level run up by BY, BW, HE and HH since the same year.
In addition to the states’ direct equalisation payments there are direct transfers from the federal government to the state budgets in the form of so-called Bundesergänzungszuweisungen, or supplementary federal grants. These are disbursed to the states for various reasons. General supplementary grants go to states for instance whose financial capacity falls short of the average after equalisation payments, but they are also disbursed for “special needs” (take, for example, the funds of Solidarity Pact II for the east German states or for the so-called administrative costs). So far, in any event, there has never been any lack of suitable purposes for drawing supplemental federal grants; incidentally, they have been available for disbursement since 1967. The scope of supplementary grants has also expanded strongly since 1995, outstripping the direct LFA payments by far (totalling EUR 24.3 bn by 1994 and no less than EUR 209.3 bn between 1995 and 2009). If the supplementary federal grants are added to the LFA transfers, the volume of total payments becomes yet higher again by a huge amount.
This cursory glance at the payments to date already highlights the fact that there is a pronounced system of mutual support between the different levels of government. In view of the structural differences between federal states with particularly robust and particularly weak financial capacities one could indeed also refer to this system as a transfer union. Given the volume and dubious incentive effects of the fiscal equalisation system, one can hardly imagine the depth of the fiscal abyss that could materialise if any sort of similar system were to be introduced at the European level (also by the back door).
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