Squeezed Cities in Highly Indebted States Cry Out for Aid Amid Budget Conflicts
Countries advocate for a remedy to revenue leakage via 'Investment Enhancer' scheme
States across the nation are in a tussle with the federal government over an investment program meant to revitalize the economy. The program, due for a vote in the Bundestag next week, offers incentives for investments and tax breaks, but it's expected to cause revenue losses for states and municipalities.
Leaders from several states have increased their pressure on the federal government, urging a swift resolution to address the revenue shortfalls before next week. Olaf Lies, the head of government in Lower Saxony, has urged a solidified agreement that leaves no room for doubt. "By next week, we'll have the Bundestag decision in hand. Until then, we need a proposal that leaves everyone feeling secure," he said.
Under scrutiny, the program aims to rejuvenate the sluggish economy and contains several benefits, such as extended tax depreciation options for machinery and electric vehicles. However, write-offs will lead to falling tax revenues for the federal government, states, and municipalities.
Indicating the precarious fiscal situation of many indebted municipalities, the states are demanding financial compensation from the federal government. Mecklenburg-Western Pomerania's Minister-President, Manuela Schwesig, hinted at partial compensation. "Our primary objective is for the municipalities to receive full aid, andof course, we need to accommodate the states as well," she said.
At the talks today, a decision must be made regarding compensation and the extent of it. Thuringia's Minister-President, Mario Voigt, has called for fundamental clarification of federal-state financial relations, proposing an almost automatic compensation mechanism for cases where the federal government's decisions result in tax shortfalls for the states.
"We need a solid proposal before the next vote in the Bundestag," Voigt emphasized. After the legislation is passed, the law goes to the Bundesrat, where the states have the final say on July 11th.
Beneath the Surface:
With the investment program expected to negatively affect the tax revenues of states and municipalities, the exact mechanisms employed by the states to financially support their overlapping debt-laden cities remain uncertain. While German states operate under debt brake rules, they can use mechanisms like increased fiscal equalization transfers and prudent budget management to help municipalities weather financial crises. However, limited financial flexibility and cautious budget talks at the EU level may indirectly constrain additional compensatory spending[2].
Keywords:
- States
- Federal Government
- Municipalities
- Investments
- Tax Revenues
- Public Debt
- Funding Compensation
- Bundesrat
- Bundestag
- Minister-President
Source: ntv.de, raf/dpa
[1] German Council of Economic Experts, 2021 Annual Report[2] Bundesweite finanzielle Perspektiven, 2021, Bundesministerium der Finanzen[3] Kommunalpolitik im Wandel - Änderungen der Finanzbeziehungen zwischen Bund und Ländern, 2020, Deutsches Institut für Wirtschaftsforschung (DIW)
- The states are demanding financial compensation from the federal government to help offset the expected revenue losses due to the investment program, which will impact both their and the municipalities' tax revenues.
- In light of the precarious fiscal situations of many indebted municipalities and the expected revenue losses, Thuringia's Minister-President, Mario Voigt, has proposed an almost automatic compensation mechanism for cases where the federal government's decisions result in tax shortfalls for the states.
