Large differences in area and populationexisted among the Länder even before unification; in 1988 thecity-state of Bremen, area 400 km2 and population 650,000, had the same constitutional status asBavaria, area 70,500 km2,and North Rhine-Westphalia, population 16.8 million. The ability of suchdisparate economic units to bear symmetrical constitutional responsibilities,especially in the context of the goal of uniformliving conditions, was often questioned. In the 1980s, increasing disparitiesin economic development among the Länder put financial pressure on the poorer Länder, and placed greater strain oninter-Länderbargaining over financial equalization.25 In thepost-reunification period, the difficulties were made even more salient:economic disparities deepened, and were compounded by cultural differencesamong the former western and eastern Länder.
While initial transitional financialarrangements were made in the wake of reunification, and subsequent long-termadjustments made in the financial equalization system, differences in size,population, and level of economic development continue to generatedisagreements among the Länder. The result has been a growingunease with the equalization system. The recipients believe the system isinadequate to their needs, as it aims mainly to equalize revenues from sharedtaxes, but does not take into adequate account the higher per capitaexpenditure requirements of the poorer Länder. Meanwhile, the contributorsbelieve the system subsidiseseconomic and financial mis-management among the poorer Länder, and penalises theLänder that are bettereconomic managers.
Superimposed on these issues are concerns on the part of the richer Länder that the Federal governmentwill exploit the weak position of the poorer Länder to gather more power toitself. They fear the Bund will use the ‘golden leash’ of supplementary funding toconvince the poorer Länder to cede responsibilities to the Federal government. The resulthas been calls for the further reform of Germanfederalism
5. Transparency andAccountability
Revenue and ExpenditureResponsibilities of Governments
Despite the extensive constitutionalspecification of legislative, administrative, revenue-raising, and expenditureresponsibilities, the German system of fiscal federalism exhibits a degree ofcomplexity which is inimical to accountability and transparency.
The Länder are responsible for the most important administrative functions in Germanfederalism, including the implementation of federal law. While there areprovisions for the federation to provide financing of activities mandated byits legislation, and such legislation must pass through the Länder-controlled Bundesrat, it remains the case that Länder are consistently left withuncompensated administrativecosts. For example, the Länder are responsible for the costs when they execute federal law asa matter of their own concern, (Article 83) and it istheir responsibility to cover the administrative costs incurred by localgovernments in implementing legislation.(Article 104a(5))26 Only insituations in which the Länder are acting as agents of the Federal Government, as in somecapital construction, are the costs covered by thefederation, and even then ongoing administrative costsare a Länderresponsibility. In addition, for some categories of co-financed projects, theBundesrat has a veto only if one-quarter or more of the costs, excludingadministrative costs, are to be met by the Länder(Article 104a(3)). Overall, thenet result is that accountability is decreased, as the Länder ‘foot the bill’ for some federally mandatedinitiatives.
Beyond the accountability problems involvedin the shifting of administrative costs from one order of government to theother, transparency is decreased by the complexity of the entire fiscal federalsystem. The interdependent network of shared taxes, equalization transfers,expenditure responsibilities, and even decision-making institutions renders itpractically impossible for voters to identify which government is taxing orspending for particular purposes. Thus, in Germany the principles ofsubsidiarity, economic efficiency, and revenue equalization have largelytrumped accountability.
B. A Summary of Federal and State BudgetaryRelations in Germany
This section contains a description of thestylized facts and the relative magnitudes of federal and state (includinglocal government) responsibilities and how they have evolved over time. Thisincludes the shares of federal and state governments in public spending andrevenue allocation as well as the importance of transfers between and amonglevels of government. Of particular significance is the impact of Germanunification on federal-state and state-state fiscal relations. Not only did theintegration of the former east German states into the Federation seriouslystrain the extant system of intergovernmental fiscal relations, it alsoresulted in dramatic shifts in flows, especially federal-state flows throughthe allocation of the Unification Fund.
The German system of budgetary relations isdominated by the uniformity-of-living conditions principle noted in Section Aof this report. This is articulated in Articles 72 and 106 of the Basic Law.Article 72 [Concurrent legislation of the Federation] reads:
On matters within the concurrent legislative power, theLänder shall have theright to legislate so long as and to the extent that the Federation hasnot exercised its legislative power by enacting alaw.
The Federation shall have the right to legislate on these mattersif and to the extent that the establishment of equal living conditionsthroughout the federal territory or the maintenance of legal and economic unityrenders federal legislation necessary in the national interest.
Article 106 [Apportionment of tax revenue]lists federal taxes, state taxes, and common (joint) taxes. As noted in SectionA, most of the major tax sources are placed in the third category involving aconstitutionally-mandated sharing of specific tax revenues. Of particularrelevance here, Article 106(3) specifies that shares in the VAT shall bedetermined based on the following principles:
The Federation and the Länder shall have an equal claim to funds from current revenue to cover theirnecessary expenditures. The extent of such expenditures shall be determinedwith due regard to multi-year financial planning.
The financial requirements of the Federation and the [Länder] shall be coordinated in such a way as to establish a fair balance, to avoidexcessive burdens on taxpayers, and ensure uniformity of living standardsthroughout the federal territory.
In many ways, German federalism emulates theunitary state. Intergovernmental fiscal relations are largely ruled by theso-called financial constitution, comprising Articles 104-115 of the Basic Law.Revenue apportionment is roughly commensurate with expenditure responsibility.In this regard, the balancing role of shares in VAT is particularlyimportant.
Equal per capita distribution of VAT impliesa fully equalized revenue source—so-called first-tier equalization. However, state-stateequalization of income tax revenues—so called second-tierequalization—places animportant function of the federal government in the context of federal systemssuch as Canada instead in the hands of the German states. Moreover, thisoperates as a net scheme.
Federal and State Sharesof Total Public Spending and Government Revenues
Table B.1 provides data indicating the sharesof federal and state governments in total public sector spending. These datainclude federal supplementary grants; that is, transfers in the form ofsupplementary grants to states are included as a component of federal spending.The provision in 1969 for negotiated changes in federal and state shares of VATin light of shifts in relative expenditure responsibilities obviated the needfor supplementary grants to poorer states which had previously accommodatedvertical fiscal imbalance. Following unification in 1990, however, allocationof the federally controlled German Unity Fund again increased the federal sharein spending. As the former east German states have been integrated intostate-state equalization, the federal share has again fallen. By the sametoken, the states’share in spending has risen.
Table B.2 provides data indicating the sharesof federal and state governments in total public sector revenues. These datainclude federal supplementary grants. Again, transfers to states dropped withthe 1969 arrangements on VAT allocation, increasing the states’ share of revenues. Transfers tostates increased in 1990 with the introduction of the German Unity Fund,financed in part through a federal income surtax27 but also through areallocation of VAT revenues in favour of the states, which increased thestates’share.
Table B.1. Federal and State GovernmentsShares (Percentages) of Total Expenditures Including Transfers (FederalSupplementary Grants)
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