German Government Expected to Comply with Debt Brake, Scepticism Regarding Various Federal States

A vast majority of the members of the German state parliaments is optimistic that the German government will be able to meet the requirements of the debt brake, which entered into force this year. In addition, a great number of parliamentarians is confident that their home states will remain within the debt limits, which will be binding for all federal states as of 2020. When it comes to their predictions regarding the ability of other German states to reach a balanced budget, however, the MPs are not quite so optimistic. According to their estimations, only Bavaria, Baden-Württemberg, Saxony and Hesse will be able to meet the requirements. These are the findings of a survey among members of all 16 German state parliaments conducted by the Mannheim Centre for European Economic Research (ZEW), in collaboration with the University of Mannheim in 2015–16. Compared with the results from a first, similar survey carried out in 2011–12, this year’s results indicate a significant increase in optimism regarding the central level's ability to remain within the debt limit but, surprisingly, not with respect to the states.

This year has already seen the full effectiveness of the constitutional debt cap on a national level. On state level, however, the constitutional debt brake will only become binding as of 2020. In contrast to the debt cap on state level, the federal government has a structural leeway, which permits a deficit of 0.35 per cent of GDP. Enshrined in Article 109 III of Germany's Basic Law in 2009, the debt cap envisages a long transitional period, which has raised doubts among many decision-makers about its credibility. Against this backdrop, ZEW has now once again conducted a survey among members of all 16 German state parliaments in three different waves. Out of 1,857 members of state parliaments, 669 participated in the survey.

Strong asymmetry among states

The results of the second survey reveal a growing optimism regarding the national government's ability to remain within the debt limits. This is an obvious consequence of the considerable improvement of public finances since the first survey four years earlier. Quite surprisingly, parliamentarians are not as optimistic as far as the federal states are concerned. The results furthermore show a strong asymmetry in this regard: While the respondents are mainly confident that their own states will manage to meet the requirements of the debt brake valid as of 2020, many voiced their scepticism as to whether other states will remain within the debt limits. According to the survey, the majority of the parliamentarians believe that merely four federal states (Bavaria, Baden-Württemberg, Saxony and Hesse) will be able to accomplish a balanced budget.

The respondents agreed with the statement that the compliance of their own state with the debt brake is a desirable objective. Their response was, however, not prompted by fear of financial sanctions. According to the survey, the majority of the parliamentarians do not expect the central government or Federal Constitutional Court to impose any sanctions on states which fail to comply with the deficit target. Instead, the more likely reason as to why the surveyed politicians are motivated to remain within the debt limits is that they recognize the need for deficit reductions and seek compliance with the principles enshrined in the Basic Law.

The financial leeway of the federal states, which is already fairly limited due to restricted fiscal competences, will be further reduced once the debt brake rules enter into force. This will pose a considerable challenge for smaller states with weak financial positions, since the debt brake may endanger their financial viability and raise the need for federal state mergers. State mergers, an important federal issue, were not met with great enthusiasm among the respondents. Although most of the surveyed politicians are open towards reducing the number of states, a clear majority of the respondents is, however, opposed to federal state mergers involving their own states.

For more information please contact

Prof. Dr. Friedrich Heinemann, Phone +49(0)621/1235-150, E-mail heinemann@zew.de