Date 2023.04.04

The federal government finances the state and local governments’ constitutional tasks to a considerable extent. In 2021 alone, the federal government spent €23.9 billion on grants made to the federal states. At the same time, the states’ revenues are rising and their debt ratios are falling. However, the federal government needs to borrow ever-higher amounts to accomplish a balanced budget. In our recent advisory report, we therefore advise the federal government to review the grants provided to the federal states.

Pursuant to the German Constitution, the federal government and the federal states each separately finance the expenditures arising out of the discharge of their responsibilities. The overall tax revenues are to be distributed between them accordingly. Since 1991, however, the federal government’s share in total tax revenues has declined by 10.3 percentage points. This means that the federal government has only about 38 per cent of total tax revenues at its disposal to perform its functions – compared to 48 per cent in 1991.

This decline is mainly due to the fact that the federal government has chosen to give a substantial additional share of turnover tax revenues to the federal states. Over the last 30 years, the federal government has chosen to transfer about 20 per cent of its share of turnover tax to the federal states.

In 2021, the federal government also spent about €23.9 billion on supplementary grants to fund state and local governments’ core tasks. This amount has been rising steadily for years. As a result, the federal government has an ever-smaller share of financial resources at its disposal to fund its own tasks.

State revenues clearly exceed federal revenues

In addition to tax revenues, state and local governments’ revenues are also funded by other sources, e.g. fees. It is therefore important to look at the total revenues when assessing the financial situation of the federal government and the federal states. In fact, the total revenues of the federal states have been rising continuously since 2010. Since then, they have also clearly exceeded the revenues of the Federal Government. 

Since 2020, the debt ratio of the federal states has been growing, but it has been falling in relation to the debt ratio of the federal government. The reasons for this are twofold: First, the federal states have to comply fully with the structural borrowing rule laid down in the Constitution and have not been allowed to incur any new debt since 2020. Second, the federal government incurred a large amount of new borrowing to tackle the economic impact of the coronavirus pandemic. On the whole, the financial imbalance between the federal government and the federal states is growing.

Given scarce public resources, priorities need to be set

Pursuant to the Constitution, the territorial entity which is required to fulfil a certain function must also finance it. The federal government and the federal states must put this constitutional principle into practice and reassume financial responsibility for their own mission performance. In view of limited public revenues, we believe that it is reasonable to expect the federal states – and the federal government – to set priorities when fulfilling their tasks. The scarcity of public resources means that the feasible must take precedence over the desirable.