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.