The German press was disappointed. The weekly “DIE ZEIT” wrote “…many issues remain open…” and the daily FRANKFURTER ALLGEMEINE ZEITUNG commented “…the debt brake will come, but how tight, remains vague…” Yes, there was a general agreement to introduce a general government debt brake, the most important issue of the commission’s mandate; there was a consensus that generational equity considerations call for the current generation to spend and borrow less, or even save.
But the Federalism Reform Commission II could not agree on the precise limit for new borrowing. While Oettinger and the CDU are supporting a strict borrowing rule of a balanced general government budget over the cycle, with only few exceptions, such as natural disasters, Struck and his party want the general government to be able to run a fiscal deficit of up to 0.75 percent of GDP, even in good days. A working group has been created that will further discuss the issue and hopefully find a solution. A possible compromise may be the suggestion of the Minister of Finance, Peer Steinbrueck, of a borrowing limit of 0.5 percent of GDP.
Neither of the proposals, however, will result in a reduction of the stock of general government debt, currently amounting to Euro 1.600 billion or about Euro 18.000 per capita that was accumulated over the last 40 years only. The commission felt that this should remain on the backburner for the next 5 to 7 years, but should then be reconsidered. Nevertheless, in terms of GDP, the stock of general government debt is likely to fall over time under either of the debt brake formulars.
The other two main areas of the commission’s work were on the fiscal equalizations system among the Laender and the fiscal relations between the federal government (Bund) and the Laender. Here, the commission suggests creating a special debt service fund that would help poorer Laender to meet their interest payments obligations. The special debt fund would be financed in equal parts by the Bund and all Laender. However, no agreement was reached on how the Laender will share the financing burden among themselves. A working group was formed to look further into this issue
On the tax side, a swap of some taxes was suggested. The commission suggests to reassign the motor vehicle tax from the Laender to the Bund and the property taxes on holding and buying land (Grundsteuer und Grunderwerbssteuer) from the Bund to the Laender. It had been expected that the Federalism Reform Commission II would suggest the creation of a central tax authority, but it did not. The federal government was pushing for it, but the Laender blocked. Again, a working group will look into this issue further.
On the expenditure side, the Federalism Reform Commission II recommended that the Bund withdraws, though not fully, from the business of building and maintaining highways. It was suggested that the Bund keeps only the larger highways. All other roads would be constructed and maintained by the Laender and Gemeinden. As a result, many highways known to those of us who travel in Germany as Bundesstrassen will become Landstrassen in the future.
What are the next steps? The various working groups will now need to come up with recommendations that are acceptable to the Federalism Reform Commission II Oettinger and Struck are confident that this will happen between now and October 2008. If this is the case, the German upper and lower house could then enact the reforms in early 2009, before the next general elections in the fall of the same year.
My PFM Blog posting of February 29, 2008 reported on the reform of the intergovernmental system that is currently underway in Germany. It is a two-stage reform process. The first stage was completed in 2006. Monday, June 23, 2008 was a milestone for the second stage, when the Federalism Reform Commission II presented its report to the public. 
