How the federal states pile up mountains of debt through the back door

Berlin The pot should “have it all”, announced the new state government, and it has. The new climate special fund of the city of Berlin is to comprise up to ten billion euros. The new CDU-led state government wants to “give a boost” to climate policy.

Berlin is not the only federal state that is imposing such a special debt pot that bypasses the debt brake. NRW, Bremen and Saarland have also recently decided on new billions in debt. The small Saarland surpasses everyone: the special pot in Saarbrücken is three billion euros – with a budget of just 5.4 billion euros.

After the federal government created more and more extra budgets since the outbreak of the corona crisis, the federal states are also increasingly levering out the debt brake – to the horror of many economists. “I think the new special funds are a danger,” says finance scientist Lars Feld, who also advises Finance Minister Christian Lindner (FDP).

Above all, three federal states, which for years were considered to be particularly weak, but had recently caught up financially, are moving back into focus: “Saarland, Bremen and Berlin in particular are at risk of falling into another budgetary emergency if the funds used do not provide the hoped-for growth impulses lead,” says Feld.

The Scientific Advisory Board of the Stability Council is also critical in a new statement. More and more shadow budgets made state budgets non-transparent and made it difficult for the Stability Council, which oversees the finances of the federal and state governments, to “monitor the compliance of public finances,” write the economists.

Debt brake is stricter for states than for the federal government

Thiess Büttner, head of the Stability Council’s Scientific Advisory Board, warned of ever-increasing national deficits. In addition, extra budgets jeopardized compliance with European debt targets. Unlike in Germany, the outsourced debts in Europe are taken into account when applying the debt rules.

>> Read here: Poor federal government, rich federal states: The federal government is faced with new tasks – but the income is only increasing in the federal states

The Saarland was a pioneer in the development of creating new sub-budgets at state level. The Finance Minister there, Jakob von Weizsäcker (SPD), was not a friend of the debt brake even when he was Olaf Scholz’s (SPD) chief economist in the Ministry of Finance. Even then, he was looking for ways in which the state could invest more despite the strict requirements of the debt rule anchored in the constitution.

The debt brake is even stricter for the states than for the federal government. Unlike the federal government, which has at least a small margin of debt, the states are not allowed to incur any new debt. Many state finance ministers do not think this makes sense. So also from Weizsacker.

As Saarland Minister of Finance, he is now putting his earlier ideas into practice. The Saarland is particularly affected by structural change. The small federal state is characterized by automobile production, almost all larger companies are threatened by it. The state government is therefore investing in the future.

Jacob von Weizsacker

The Saarland Minister of Finance is not an advocate of the debt brake.

(Photo: IMAGO/BeckerBredel)

The Saarland state government sees its strategy confirmed by recent successful settlements such as that of the US semiconductor manufacturer Wolfspeed. So she wants to use the money from the special pot for such settlements.

However, the Saarland has provided other federal states with a questionable blueprint, says economist Feld. “The Saarland still pays attention to the investment orientation of its special assets, others no longer at all,” he complains.

Above all, the question arises as to whether the establishment of shadow budgets is still appropriate and therefore still legal. In recent years, the federal states have secured ever larger shares of the total tax revenue and still have more and more services paid for by the federal government. “The federal states should therefore be in a better position to deal with shocks on their own,” says Düsseldorf economist Jens Südekum.

Criticism of special assets of the countries

At the end of last year, North Rhine-Westphalia set up a special fund of up to five billion euros for “crisis management” in connection with the Ukraine war. The assets are limited to one year, after which the funds can no longer be used, says North Rhine-Westphalian Finance Minister Marcus Optendrenk (CDU). It is therefore precautionary against Long-term financing via special funds has been taken.

>> Read here: The federal government is preparing an austerity package – an internal paper mentions a gap in coverage

It is different in Bremen and Berlin. The governments there only acted this year – when the crisis was actually over. Bremen, for example, has applied the emergency clause, which allows more debt, and has taken on liabilities of three billion euros that are to flow into the regular budget.

Economist Südekum describes it as “unconvincing” that Berlin is planning changes to the budget “quickly now”. He is otherwise open to special funds at state level if a state government is using them to defend the economic basis against energy price shocks or to advance the transformation.

It is also remarkable that the CDU Prime Ministers in North Rhine-Westphalia and Berlin have no problem tricking the debt brake, but at the same time the Union in the federal government is suing the Federal Constitutional Court against the federal climate special fund.

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