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uni'wissen 01-2014_ENG

not far behind. Feld tested the states’ fiscal health in four steps: He began by studying the development of their debt ratio and the relation between revenue and spending in each of the fiscal years. Then he considered their primary balance – revenue without earnings from interest minus spending without interest payments. “This indicates whether the government has deter- mined that it needs to run a budget surplus to ward off the debt dynamics driven by the growing interest burden.” Finally, he analyzed the factors responsible for increasing the debt – such as inflation, economic growth, or the development of interest rates. “In the end, we determined that most of the states react insufficiently to an increase in debt,” summarizes Feld. This is true although the finan- cially weaker states profit from the financial equalization scheme between the Federal Gov- ernment and the states and although conditions are favorable for counteracting the negative dynamics of the debt-to-GDP ratio: Economic growth has exceeded the interest rate for the past three years – which has only been the case for an extended period of time once in the history of the Federal Republic, in the years of recon- struction after the Second World War, and is thus rather an exception. “Germany is the winner of the euro crisis. It is seen as a safe haven and gets cheap credit on the capital market, the eco- nomic upswing endures, tax revenue increases.” In addition, the German states need to change course: From 2020 on they can no longer finance their spending with loans. That is the condition of the so-called debt brake, an amendment to the German constitution Feld supported, “the most rigid regulation of its kind in the world next to that of the Swiss, on which it is modeled.” So why are the states still having so much trouble with it? Their biggest problem, according the economist, is their lack of fiscal autonomy. Budget Cuts Aren’t Enough At present, the German states can only reduce their debt by cutting their spending. Feld sees more than enough places for them to start. “There are dozens of examples of how the states squander their money: construction projects like Stuttgart 21, the Elbe Philharmonic Hall in Ham- burg, or the Berlin Airport, all of which have become much more expensive than originally planned, or subsidies and other forms of eco- nomic development.” But in his opinion, budget cuts aren’t enough. For one thing, politicians hoping to be reelected are reluctant to pass un- popular budget cuts. Instead, they prefer to attract voter support with their own, occasionally expen- sive projects. Second, large parts of the budget are virtually set in stone for the short term. “Per- sonnel costs, for example, make up around 40 percent of the budget. It’s not possible to save money on government employees from one day to the next.” On the other hand, the individual states have only little influence on tax revenue. The only tax rate they can set freely is that for land transfer. “However, it makes up such a small part of the budget that the revenue it generates is almost a “There are dozens of examples of how the states squander their money.” Two have their finances under control (green), three are close to it (yellow), and the other eleven (red) are far from having a sustainable budget: Most of the German states are not doing enough to curb their rising debt levels. Illustration: Anja Kaiser/Fotolia, Kathrin Jachmann 14