German budget consolidation under threat by its own Länder

During the first 5 months of 2014 the Länder’s deficit increased by around €1.8 billion. In spite of the strength of the German economy, 11 out of 16 regions are in a worse budget situation than a year ago. As the leading business newspaper “Handelsblatt” puts it, referring to estimates of the Federal Ministry of Finance the regions spent €6 billion more than their revenue income in the first five months.

Only Bavaria, Saxony and Lower Saxony achieved a surplus. In 2013 there were five Länder with a positive balance. The total expenditure has gone up by 4%, while revenues have increased by 2.%.

However, “figures for the first five months are just an indicator and likely to be biased by seasonal effects,” says Dr. Thilo Schäfer, senior economist from the Cologne Institute for Economic Research.

“Nevertheless, overall tax revenue is high so there is no obvious reason to increase deficits like several German Länder have done so far this year.”

In particular, the Länder have been increasing their expenses for staff, investment and municipalities. This is exactly what the international organizations (EC, IMF and OECD) have been asking to the federal government for the last months. But the German ‘debt brake’ law is clear and it forces all Länder to reach zero deficit in 2020.

“For a handful of Länder this is a huge task. Hence, there is no room for any delay in the fiscal consolidation process. Rising deficits now can only mean further and harder consolidation the following years. Low interest rates should help them to achieve that goal,” warns Dr. Schäfer.

In fact, the financial situation of German regions would be even worse if rates wouldn’t have decreased by 8.3% during this period.

“Low interest rates are advantageous for the actual debt, not only for new loans. Overall, expenditures can no longer grow faster than revenue,” concludes the expert in Financial and Tax Policy from the Cologne Institute for Economic Research.

SinceJuly 1, Mr. Schäuble, main supporter of tight fiscal discipline in the Eurozone, will co-chair the G7 Finance Ministers meetings along with Bundesbank’s head Jens Weidmann. Thus he will have to watch out closely for what happens within the German borders, considering that the Länder could divert from his budget consolidation prescriptions and endanger the worldwide respected “German model” and its appreciated market trust.

About the Author

Alberto Lozano
Alberto Lozano is The Corner correspondent in Berlin, from where he reports about the main German and European economic and political topics. He has been a contributor to various media such as RTVE, PressEurop, Esquire and Forbes. Alberto holds a degree in Journalism from the Complutense University in Madrid and the Free University of Brussels.

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