FEDERALISM REFORM II: A REAL FINANCE REFORM?
General Considerations
As we have seen, Federalism Reform I dealt mostly with the arrangement of law-making authority between the federation and the Länder. With the exception of some changes noted above in Articles 91a and 104a and provisions concerning the EU’s Growth and Stability Pact, it largely ignored financial issues.
Federalism Reform II focused on finances, but it did not deal with the complicated and politically difficult issues of tax autonomy for the Länder, the distribution of tax revenues between the federal and the Land governments, or the controversial fiscal equalization procedures by which the richer Länder transfer funds to the poorer Länder, all of which would be the subjects of real finance reform. Instead, it concentrated on the public debt incurred by all levels of government over decades of deficit spending and the apparent inability or unwillingness of governments to function without continuously borrowing large sums of money. Concern over the public debt had been growing for many years, but the world-wide recession that began in 2007 led to growing alarm over the levels of deficit spending and accumulating debt.In March 2007 a Federalism Commission II (Kommission zur Modernisierung der Bund-Länder Finanzbeziehungen) was set up with sixteen voting members from the federal and Land levels, respectively.44 Four members representing the federation were appointed by the federal executive, while the other twelve members were appointed by the federal parliament, the Bundestag. All sixteen of the Länder representatives were appointed by the individual Land governments. There were seven nonvoting members: four from the Land parliaments and a representative from each of the three local government associations for the cities, towns, and counties. Two chairmen were elected by the commission members: Peter Struck, the SPD party leader in the Bundestag, and Günther Oettinger, the prime minister of Baden-Württemberg.
The Regulation of Budget Deficits and Debts
The central part of Federalism Reform II is a rearrangement or new regulation of constitutional limitations on debt. The core provisions of this “debt brake” consist of significant changes in Articles 109 and 115, as well as the additions of Articles 109a and 143d.45
The first paragraph of Article 109 was not changed in the 2009 reforms. It states that the federation and the Länder are independent and autonomous from each other in budgetary matters, although this does not prevent federal financial assistance in certain areas. Local governments also enjoy budgetary autonomy from the federation but not from the Land of which they are legal parts.
Paragraph 2 is largely new and obliges the federation and the Länder to meet the requirements of the Growth and Stability Pact of the European Union that “contribute in this framework to the overall economic balance.” According to these requirements, governments are to construct budgets that are close to being balanced without borrowing or that even show some surplus. The total of the budget deficits from all levels is not to exceed the EU standard of 3 percent of GDP. The federation is responsible for eventual deficits in social services, and the Länder are accountable for deficits incurred by their local governments.
The new paragraph 3 is the key revision of Article 109.46 It states that the budgets of the federation and the Länder are in principle to be balanced without borrowing. Some exceptions are to be allowed for abnormal economic circumstances or for the results of natural catastrophes or for other emergency situations beyond the control of the state and in which government financial capacity has been significantly reduced. An appropriate repayment scheme must be provided for the emergency regulations. Only the federation may borrow up to 0.35 percent of GDP to balance its budget in normal times.
Article 115 permits borrowing more than 1.5 percent of GDP when abnormal economic circumstances call for it, but such deficits must be made up as soon as economic conditions allow. Budgets must also reflect countercyclical spending.
For example, during recessions deficit spending is permitted, but in better economic times there must be surpluses. The detailed regulations governing any deficit spending above 1.5 percent of GDP must be set out by the Bundestag. Natural catastrophes and other emergencies beyond the control of the state may call for deficit spending, but it must be authorized by the Bundestag and include a repayment schedule.Paragraph 4 of Article 109 authorizes the federation (with approval of the Bundesrat) to place certain limits on the budget autonomy of the Länder that is guaranteed in paragraph 1 through general principles and regulations concerning budgets and long-range financial planning. These measures are to ensure that uniform, comparable procedures are used in the budgets of the federation and the Länder.
Paragraph 5 of Article 109 concerns sanctions resulting from the violation of the EU’s Growth and Stability Pact that sets a deficit limit of 3 percent of GDP for annual budgets of the member states. In case this limit is breached and sanctions are imposed, the federation is responsible for 65 percent and the Länder (including their local governments) for 35 percent of the penalty, based on their population. However, Länder that share responsibility for exceeding the 3 percent limit must pay proportionately more, up to the 65 percent rate.
The new Article 109a calls for federal legislation with Bundesrat approval that provides for a Stability Council to oversee the federal and Land budgets, to prepare procedures for dealing with a threatening budget emergency, and to set principles for programs designed to counter fiscal emergencies.
The new Article 143d deals with the timing of the finance reforms and federal grants to selected Länder. For the federation, the provisions of Articles 109 and 115 are to go into effect in 2011, although a transition period is allowed until the end of 2015, by which time any federal deficit is not to exceed 0.35 percent of GDP.
The Länder and their local governments may continue to borrow in order to balance their budgets until the end of 2019, which is also when the Solidarity Pact II for the current system of public finance ends. Budgets of the Länder prepared for 2020 must reflect the constraints of Articles 109 and 115 and be balanced without borrowing.To assist the poorer Länder in meeting the debt requirements of Articles 109 and 115 by the end of 2019, the federation may provide grants to Berlin, Bremen, Saarland, Saxony-Anhalt, and Schleswig-Holstein totaling 800 million euros annually. These grants may range from 300 million euros for Bremen, 260 million euros for the Saarland, and 80 million euros for each of the other Länder listed above. Funds will be distributed based on administrative agreements between the federation and affected Länder, in accordance with stipulations set by federal law and with the approval of the Bundesrat. The assumption is that all deficit financing in the above Länder as well as in the others will cease by 2020. The costs of the grants to the poorer Länder are to be shared equally by the federation and the Länder.
Finally, a new provision was added to Article 104b that allows the federation without specific law-making authority to grant aid to Länder that are affected by natural catastrophes or unusual emergency situations that are beyond the control of the state and create financial stress. This provision was the result of conditions created by the world-wide recession of 2008–9.
Other, relatively minor changes in the Basic Law concerning a number of administrative themes such as tax administration, public information technology, and studies of administrative quality and effectiveness are not discussed in this chapter.