Budget Battle

Federal States Reject Schäuble’s Financial Plan

  • Why it matters

    Why it matters

    German Finance Minister Wolfgang Schäuble has been trying to change the financial allocation system for some time now, but state governments want to maintain their autonomy.

  • Facts

    Facts

    • Wolfgang Schäuble wants the central government to have more say in how state governments manage their finances.
    • Mr. Schäuble wants a new federal tax administration and for state tax revenues to be more transparent.
    • A joint statement by the 16 German states obtained by Handelsblatt said that Mr Schäuble’s proposal is “professionally unacceptable and is likely to lead to considerable distortions in tax enforcement.”
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    Audio

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Germany’s Finance Minister Wolfgang Schaeuble Delivers Speech On Europe’s Future
Wolfgang Schäuble, Germany's finance minister, is trying to reform the country's system of financial allocation. Source: Bloomberg

Germany’s Finance Minister Wolfgang Schäuble is not done tussling with regional state governments. His attempt to increase the central government’s say in their budgets is being rebuffed.

For two years, the federal chancellery and state governments have grappled over financial allocation policy. Mr. Schäuble had repeatedly submitted new proposals, but state governments have rejected them all. This Friday will be the latest sit-down to try to hammer out a deal.

At a critical meeting in mid-October, the contention seemed to be all said and done. Germany’s finance minister and the state premiers had agreed to a series of reforms which greatly favored state governments. However Mr. Schäuble did manage to push through a federal tax administration which had been discussed for years, and it was agreed thatthe federal government would be given a greater say in state use of their funds. But now Mr. Schäuble stands to lose even his consolation prizes.

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A joint statement by the 16 German states obtained by Handelsblatt said that the federal government’s interventions into the jurisdiction of the states “far exceed the agreements that were made.”

The statement elicited an irritated reaction from the finance ministry, where officials accused the states of still being more interested in money than improving federal structures.

But the joint statement makes it clear the states believe that Mr. Schäuble shot well beyond the mark with his legislative proposal.

Under Mr. Schäuble’s plan, a stability council, made up of him and state finance ministers, would monitor the states’ compliance with their debt ceilings. Mr. Schäuble wants this to be based on uniform criteria according to European guidelines. The states strongly oppose the idea, arguing how debt ceilings are enshrined into constitutions and thus vary for everyone.

Mr. Schäuble’s proposal “doubly signifies a tighter regulation that goes beyond the agreement,” state representatives wrote in their statement. They are also upset that Mr. Schäuble wants debt-ridden states Bremen and Saarland, to reduce their deficit using the €400 million which the federal government has pledged them each for annual restructuring assistance. The states argue that such requirements were never mentioned before.

Mr. Schäuble also wants to give the federal government greater control over state spending in the future. States would be required to provide the federal government a more detailed accounting to show whether they are using federal funds wisely. If this is not the case, the federal government would have the power to instruct states on spending.

The states strongly oppose the idea, saying it would give “the federal government the ability to reach special agreements with each individual state on the structure of funding programs,” according to their statement.

Another issue is a digitized tax administration. Until now, the states have been primarily in control of tax data. But Mr. Schäuble planned tax administration which would enable the federal government to keep an eye on whether taxes are being collected effectively, by which states, and where there are potential cases of tax fraud.

States fear the high costs of implementing the new system, which is why they reject both uniform IT standards and providing the federal government with legislative power in this area. Likewise, they resisted Mr. Schäuble’s idea that federal state boards could exert influence via the tax administration in the future. They argue it “interferes too extensively into the core area of the states’ right to organize their own affairs.”

In a sharp rebuttal of Mr. Schäuble, the states write that the entire proposal is “professionally unacceptable and is likely to lead to considerable distortions in tax enforcement.”

State officials believe that the issues of digitization and expenditure control, as well as controversial funding of advancements on alimony and child support payments for single parents, will likely be addressed in a meeting by Mr. Schäuble, Chancellor Angela Merkel and state premiers on December 8.

 

Martin Greive is a correspondent for Handelsblatt based in Berlin. To contact the author: greive@handelsblatt.com.

 

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