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uni'wissen 01-2014_ENG

“The result is that only Bavaria and Saxony have a sustainable budget.” Competition generates pressure. It requires commitment, top performance, a willingness to try out new ideas. The risk of failure is great. That is why no one wants competition. But for Prof. Dr. Lars P. Feld this is no argument: “It’s not about what someone wants but about what produces good results.” That also goes for the German states. The economist demands that they be given more freedom to set their own tax rates. “Tax competition would force them to manage their money better, and that would have a positive effect on public finance.” The Federal Republic of Germany has amassed more than 2,000 billion euros in debt, but the abso- lute amount does not say much, as Feld stresses. The key figure is the debt-to-GDP ratio. It places the country’s debt repayment status in relation to its gross domestic product (GDP) – the total value of all goods and services produced in a country during a single year. In Germany the ratio is cur- rently at roughly 80 percent. How dynamically it develops depends essentially on three factors: the interest rate on loans, the economic situation, and the efforts of the government to reduce the deficit. “When the debt in the numerator grows faster than the GDP in the denominator, because the interest rates are higher than the economic growth and the government fails to consolidate the debt, then we have a problem.” This is precisely what Feld determined to be the case for the entire German public finance system – the federal govern- ment, the states, the municipalities, and the social insurance scheme – in a study published in 2013: “The dynamics of the debt ratio in the Federal Republic have been so great since the 1970s that the public finances are no longer sound.” Now the Freiburg economist and economic sage of the German federal government has spoken up again – with two new studies on how the debt situation developed in the individual states. “The result is that only Bavaria and Saxony have a sustainable budget.” Three other states – Hamburg, Hesse, and Baden-Württemberg – are The German states should set their own tax rates; clear-cut rules create a level playing field for the strong and the weak: More competition should create incentives for reducing debt, says the Freiburg economist Lars Feld. Illustration: Svenja Kirsch 13