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February 29, 2008

Intergovernmental Finance System Reform in Germany

Posted by Christian Schiller

1848andpresent_germany A two stage reform of the intergovernmental system is underway in Germany. The German model of intergovernmental relations is based on the principle of uniform spending standards financed by horizontal transfers across Laender, together with vertical redistribution by the federal government Although the Laender have no control over tax policy, they actually administer the main shared taxes.

The first stage focused on clarifying spending responsibilities across different levels of government. Financing and revenue aspects were put aside by the first federalism commission. A compromise was reached to clarify legislative authority across levels of government. The compromise reflected the differences of interest across the Laender. However, the compromise did not significantly alter the overlapping functional responsibilities. One such area of overlap in Germany is primary education.

The second stage, which is currently under way, will focus on revenue and financing issues. On the administrative side, a fundamental reform is the proposal to centralize the tax administration. Another proposal of the second federalism commission is to provide Laender with some access to own-resources revenue. Measures are also suggested to control sub-national debt.

"Reforming Intergovernmental Fiscal Relations" is the main topic of the latest Newsletter of GTZ , which was sent out in December 2007 (No. 10). It includes, inter alia, an interview with the German emeritus professor and FAD panel expert Bernd-Paul Spahn on the topic against the background of the reforms already undertaken and still under discussion in Germany, but also touches on what role technical assistance can play in the reform of intergovernmental relations in developing countries. To subscribe to the GTZ newsletter, you have to send a short e-mail to public-finance@gtz.de.

Finally, the concluding statement of the most recent IMF mission contains some discussion of the German efforts to improve the system of intergovernmental relations (see www.imf.org Germany: Article IV Consultation, concluding statement of the IMF mission), with probably more to come in the forthcoming IMF Board papers. The IMF mission encouraged the government to use the second stage of reforms to improve incentives for increased efficiency and to contain long-term risks to the budget. It also reminded the German authorities that timely and consistent data on Laender finances are needed for transparency and monitoring.

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