16 Against One

Shaking Down Berlin in Financing Shake-Up

schaeuble angry looking_ap
Will Schäuble play ball?
  • Why it matters

    Why it matters

    The German complex federal-state financial model is based on a redistribution of tax revenues from richer to poorer states, which has led to resentment in the past.

  • Facts

    Facts

    • Germany’s 16 states have agreed on their proposal for reforming the federal-state financial model.
    • They want Berlin to come up with €9.7 billion to finance the new system, instead of the €8.5 billion on offer.
    • Richer states, such as Bavaria, want to reduce their contributions to poorer states via the current scheme.
    •  
  • Audio

    Audio

  • Pdf

Just in time for Christmas, the 16 states that make up Germany’s federal system have come up with their list of what they would like from Berlin: €9.7 billion.

Whether finance minister, Wolfgang Schäuble, turns out to be Santa Claus or Scrooge remains to be seen.

The demands come as Germany’s 16 states finally stopped squabbling between themselves and reached an agreement on how they want to be financed going forward.

The rub for Berlin is that the only way they could reach a deal on the redistribution of tax revenues involves the federal government coming up with more funding from its coffers so that no state comes away empty-handed.

For years richer states, such as Bavaria, have complained that the complicated system of transferring funds from wealthier to poorer states is unfair to them. Bavaria and Hesse have even filed a legal challenge against the system with the country’s highest court.

On Thursday, however, the states reached a deal. One whereby the central government in Berlin would contribute €9.7 billion instead of the €8.5 billion, or $9 billion, Mr. Schäuble has offered so far.

According to representatives of the states, the discrepancy is due to different accounting methods. Sources in the finance ministry said they were skeptical and would need to look closely at the figures first.

Chancellor Angela Merkel’s initial response was cautious and non-committal. “The federal government has taken note of it. We have not had the opportunity to deal with the proposals,” she said.

A comprehensive reform of the so-called Länderfinanzausgleich, or state fiscal equalization, has been in the works for years.

The fraught negotiations between the states had taken a year longer than originally envisaged.

Late on Thursday afternoon, after the states finally saw eye-to-eye, agreeing to scrap the system in its current form, they went to the chancellery to present their proposals to Ms. Merkel and Mr. Schäuble.

By asking Berlin for more money, the richer states feel less burdened while the poorer ones don’t have to fear a hole in their budgets.

The states’ plan envisages getting rid of the current system of transfers and instead regulating redistribution via sales taxes.

“We have agreed. The result pleases everyone,” Stanislaw Tillich, premier of Saxony, said referring to the 16 state premiers.

“It is almost historic, what we have accomplished here today.”

Volker Bouffier, Premier of Hesse

Volker Bouffier, premier of Hesse, said: “It is almost historic, what we have accomplished here today.”

The states are now putting pressure on Berlin to accept their proposal, which would be implemented starting 2020.

“If those volumes don’t come, then we are all quitting,” said Rainer Haseloff, premier of Saxony-Anhalt and a member of Ms. Merkel’s conservative Christian Democrats.

He added that the old system, whereby the former east had a special position, would be replaced with one in which structurally weak regions would be given additional help. “The old GDR border does not play a role anymore.”

Bavarian premier Horst Seehofer announced his satisfaction. “After long discussions, we finally have a reorganization of fiscal equalization,” he told the Kölner Stadt-Anzeiger paper. “The process of financial compensation will be canceled and the tax distribution will be fairer.”

If the plan is adopted, it is likely that Bavaria will drop its legal proceedings against the current system.

After all, under the new plan, which Handelsblatt has seen, Bavaria would save €1.3 billion. At the same time, poorer states like Bremen and Saarland could also expect €800 million in extra financing.

 

The New Fiscal Equalization-01

 

The states in the former east would benefit most from the proposed reforms, with a per capita plus of €189, while city states Bremen, Berlin and Hamburg would see a €123 boost per capita.

Bavarians could expect an extra €103 per person, while the western state of North Rhine-Westphalia would only see a plus of €21 per resident. The top beneficiary would be the poor eastern state of Mecklenburg-Western Pomerania which could expect a windfall of €227 per capita.

The laws regulating the current system, including the so-called Solidarity Pact II which regulates the flows of funding to the states that made up the former East Germany to help improve public infrastructure, are set to expire in 2019. That is separate from the solidarity surcharge, the 5.5 percent tax on income that every German pays toward the rebuilding of eastern Germany. That is likely to remain in place but be refocused to help poorer regions throughout the country.

Critics of the current system say that the redistribution means poorer states lack an incentive to get their economies in order.

The government of Ms. Merkel’s conservatives and the center-left Social Democrats had agreed to a reform of the system in their coalition agreement.

The initial response from political Berlin was not warm.

On Friday, Ralph Brinkhaus, deputy parliamentary leader for the Christian Democrats, slammed the deal. “The states have come together at the cost of the federal state,” he said.

Instead of using the opportunity to take on more financial responsibility, the states are basically asking Berlin for more money.  “That is disappointing and is not acceptable,” he added.

 

Siobhán Dowling covers German politics for Handelsblatt Global Edition. Handelsblatt editors Daniel Delhaes, Jan Hildebrand, Axel Schrinner contributed to this article. To contact the author: dowling@handelsblatt.com

We hope you enjoyed this article

Make sure to sign up for our free newsletters too!