Talking point
The indebtedness of Germany's Länder – it depends on your point of view

February 8, 2013

nicht löschen!!

There has been a shake-up in the fiscal affairs of the federal, Länder and municipal governments. These developments include the implementation of the debt brake at the Länder level, assumption of the costs for providing basic old-age pensions and incapacity benefits and court rulings to implement the connection principle (causality in respect of costs) in several Länder. Even bigger changes are in the offing. In the short term there is the implementation of the European Fiscal Pact and in the medium to longer term there is the reform of the Länder financial equalisation system and of the Solidarity Pact for east Germany (the last two items by 2020). In a similar way to affairs at the European level, although the objective is to craft an efficient structure for the financial relations in a federal system, ultimately the main issue is redistribution – this is currently also being demonstrated once again by the debate about the Länder financial equalisation system.

Given the federal structure in Germany and the constantly emphasised independence/autonomy of the Länder – especially in fiscal matters – one could pose the question of how the Länder would fare if the federal government debt were divided up among them. To put it another way, what would be the debt landscape if the 16 Länder were to "go it alone" with immediate effect?

aThe appeal of this type of comparison of the debts of the different Länder is that among other things it would mitigate the problem of comparing territorial states with city-states. In addition, it would counteract the tendency of politicians at the federal, Länder and municipal levels to merely shift the burden back and forth between the levels of government – or to ignore the burdens borne by the other levels. It thus becomes clearer that in some Länder the situation is even more precarious and in others not as positive as perhaps assumed in the first instance. Last but not least the international comparison of the Federal States becomes easier.

At the end of 2011 (according to the most comprehensive financial statistics data available) the federal debt level stood at EUR 1.272 tr. This can either be divided according to the respective share of German GDP for each Land or the share of Germany's entire population. There are arguments in favour of both of these options. Population size is an important factor in the equalisation system and the distribution of tax revenues; gross domestic product is a metric that indicates the economic strength with which a Land can perform its debt service (interest and repayment of the principal). In addition, debt expressed as a percentage of GDP is a standard international yardstick.

Both distribution metrics result in partly clear differences in some of the Länder that is methodological in origin. Debt expressed on a per-capita basis is higher if per-capita GDP of a Land is lower than per-capita GDP for Germany as a whole. Nevertheless, there are three findings that can be established:

  • There are considerable differences between the Länder with values ranging from just under 60% to nearly 120% of GDP.
  • Based on the GDP ratio there are just two Länder (Bavaria and Saxony) that comply with the Maastricht limit of 60%. The debts of Berlin and Bremen in particular swelled (in 2011) to levels like those of Ireland or Italy.
  • The blame for the increase in debt does not lie solely with the financial crisis. In fact, the debt level has risen steadily in many of the Länder since German reunification.

By 2020 at the latest Germany needs to reform the financial relationships between the different levels of government. Given the worrying debt situation and the intransparent web of financial relations between the Länder and the federal government consideration should also given to greater autonomy for the Länder. The debt brake alone could otherwise prove to be insufficient. Greater autonomy would be possible on both the expenditure and revenue sides. The latter could, for example, be achieved by levying a limited surcharge on income tax. A little more autonomy compared with the current situation does not run counter to the principle of mutual support.

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