Bringing Municipal Investments to a Sudden Stop Would Be Fatal

The German Federal Ministry of Finance’s Working Party on Tax Revenue Estimates published the results of its unscheduled assessment. This special analysis had become necessary as the financial consequences of the crisis could not yet be properly assessed in the Working Party’s regular forecast in May 2020. The updated estimates confirm that the federal, state and municipal governments will face considerable losses in tax revenues as a result of the crisis. While in May the Working Party had still expected federal revenues of around 285 billion euros for the current year, estimates are now at 275 billion euros. This marks a decline of 54 billion euros compared to 2019. Professor Friedrich Heinemann, head of the Research Department “Corporate Taxation and Public Finance” at ZEW Mannheim, comments on this matter.

“It is crucial that the federal, state and municipal governments do not get intimidated by this loss of tax revenues. Bringing municipal investment to a sudden stop would be fatal. The debt break enshrined in Germany’s Basic Law set up provision for these kinds of crisis situations. For 2020, but also for 2021, governments will be well within their legal rights to exceed the debt limit. In the coming year, the federal and state governments should also make use of this leeway to run budget deficits in order to guarantee more economic security for municipalities. The Working Party will most likely be able to announce better news in the coming year, since tax revenues are expected to follow a v-shaped recovery as well.”