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You are here: Home / Audit reports / Products / Annual Reports / 2018 / P R E S S R E L E A S E German SAI’s Annual Report 2018

Nov 13, 2018

P R E S S  R E L E A S E  German SAI’s Annual Report 2018


Sustainable fiscal strategy needed

Consolidate – Invest – Reduce public debt

 

“The favourable framework conditions that currently govern the federal budget provide nothing more than an illusion of security”, said Kay Scheller, President of the German SAI when he presented the 2018 annual audit report in Berlin on 13 November 2018. “The federal budget is increasingly put under pressure from ballooning public expenditure and lacking consolidation efforts. This occurs in a situation where a financial cushion is needed for policymakers to respond to emerging challenges while avoiding public debt. What we need is a sustainable fiscal policy. Such a policy should make proactive spending a priority, review the need for current subsidies and privileges, ensure long-term stability of key budget areas and use the favourable economic environment to obtain genuine leeway for fiscal policy decisions. Such efforts also include launching a debt reduction programme because interest rates will not forever be held at the current record low.”

For the Federal Government, the 2019 budget will for the fifth year in a row be a balanced budget without any need for net new borrowing. However, this goal is to be accomplished without any consolidation efforts. Instead, government is planning additional expenditures and tax relief schemes. Spending programmes include higher statutory pension benefits which means a backstop providing for both minimum pension levels (in relation to pensionable earnings during working life) and a maximum contribution rate. Also financial support shall be earmarked for public services that come within the remit of the federal states, in particular children day care centres, primary and secondary education and building more low-income housing. Furthermore, other costly benefits such as the family home building benefit were already adopted in the 2018 budget.

No comprehensive stocktaking of the federal budget has been done. The government would be well advised to do such stocktaking especially in times with a favourable economic environment. “Consolidation is not an end in itself. It helps provide to the government the funds to take appropriate action also in the future”, said Kay Scheller. “Government action is not to encroach upon other public goods and not to burden future generations. Good public sector management requires a sustainable budget and policies that do away with outdated practices, place focus on proactive investments and do not ignore the need to reduce old debts.”

Fiscal policy is faced with the following major challenges:

  • Aging population: While the trend is still at a temporary halt, costs are rising significantly. Federal government grants to the statutory pension insurance scheme are projected to increase from €98.1 billion in 2019 (27.5 per cent) to €110 billion in 2022 (29.3 per cent). This figure does not yet include any additional benefits under the scheme recently adopted (mothers’ pension, the double backstop of pensions: minimum pension levels – in relation to pensionable earnings during working life – and a maximum contribution rate).
  • Maintenance and modernisation of infrastructure: Although investments are to be stepped up, the investment rate remains at 10 per cent.
  • The increasing assistance for state and local governments place a considerable burden on the federal budget. In 2018, the Federal Government supported the federal states and the municipalities with €80.5 billion. Another €10 billion annually will be added to this by the restructuring of the financial relations between the Federal Government and the federal states in 2020. The Federal Government has extended funding core functions of lower government levels, an action that encroaches on the constitutional assignment of responsibilities. The Federal Government thus claims for itself an all-encompassing funding role.
  • Risks at the European level: Apart from running assistance programmes for combating the European sovereign debt crisis, other major risks for the federal budget are posed by the Brexit, the new 2021-2027 multiannual financial framework for the EU budget and the proposed European banking union.
  • Abolishing the solidarity surcharge would mean a reduction in tax revenues by €20 billion annually as from 2020, which would have to be set off in other budget areas. After the lessons learnt from the unconstitutional nuclear fuel tax (with tax and interest losses of about €7 billion for the federal budget), the reduction or abolition of the solidarity surcharge should be so designed as to comply with the Constitution. It is doubtful whether the funds of €20 billion earmarked only as from 2021 in the medium-term financial plan will be sufficient for this purpose.


“These challenges require a sustainable fiscal strategy”, said Scheller. “As part of this effort, expenditures and numerous tax privileges for various interest groups need to be thoroughly reviewed.”

Apart from the fiscal risks, shortcomings in tax assessment and collection and also structural weaknesses result in considerable losses in tax revenue and excessive administrative burden. In its current annual report, the German SAI makes a number of proposals for reducing financial burdens and for better targeting federal government operations to make them more efficient and effective. The recommendations focus on a financial volume of about €10 billion, some of which are set out below:

 

Energy

Hundreds of millions of euros in excess remunerations paid to KfW development bank (reporting item 14)

Value for money of the low carbon retrofitting of housing stock is at risk as a result of excess remuneration paid to KfW. The Federal Ministry for Economics supports the improvement of energy efficiency of residential and commercial real estate and public office space with grants of some €1 billion annually. The programme is implemented and managed by the KfW (government-owned development bank). Although KfW neither bears the costs of acquiring customers nor any risks, it received total amounts of €130 million and €140 million in 2016 and 2017 respectively for running the programme. Any funds taken from the support programme are no longer available for the original programme purpose. In our view, the primary goal is to ensure that the support funds are put to best use for the purposes of such support. For this reason the Ministry should not continue the programme without modification, but conduct an economic feasibility study. We recommend that apart from streamlining the cumbersome lending procedure, the body responsible would be well advised to offer higher levels of grants or benefits and thus achieve better value for money. The grants could also be awarded by other entities.

 

Taxes

€1 billion of tax revenues foregone since no interest was levied on tax evaded (reporting item 31)

After the tax authorities had purchased a large number of tax data discs, many citizens submitted voluntary disclosures to the tax offices on financial investments abroad which they had previously concealed. We found that the tax offices only charged interest on the annual tax evaded. As a result, tax revenue of approximately €1 billion has been foregone since 2010. The reason for this is that interest is payable both on the annual tax mounts evaded and the evaded income tax prepayments. A number of staff at the tax offices were not aware of this fact. This was due to inadequate internal guidance and a lack of case examples for calculating the amount of interest on prepayments. Such calculation is a very complex, time-consuming and error-prone exercise. Pertinent IT support is not in place. The Federal Finance Ministry pledged to provide guidance on how to calculate interest payable on evaded income tax prepayments. We hold that the Ministry also needs to promptly take steps to provide relevant IT support for this exercise.


€185 million in federal budget revenue from electricity duty foregone (reporting item 10)

As a result of erroneous exemption from electricity duty, the federal budget lost €185 million. Operators of small generating installations received grants towards the generation of renewable energy and were not subject to electricity duty. This was the practice although tax exemption regulations had become obsolete in 2009. The Ministry had not been aware of this practice until the year 2015. At that time, €95 million of electricity duty arrears were time-barred. €90 million of arrears could still have been collected. However, the Ministry waived collecting this duty for the past, invoking the principle of the protection of legitimate expectation in favour of the taxable persons. The Ministry thus avoided conflicts with electricity generators. We hold that the Ministry should not have waited for tax claim to lapse and become irretrievable but collect the amounts due in the federal government interest. The Federal Finance Ministry is required in cases of doubt to levy duties. Any disputes have to be brought before the fiscal courts.


Delayed tax collection of millions of euros (reporting item 11)

After long and complex investigations, the customs authorities delayed collecting some €30 million of customs duties and taxes evaded. For six years of high workloads for the customs investigation service requiring much time and effort, the service detected suspected cases of wide-scale tax fraud by criminal gangs importing goods from Asia. The customs authority tasked only one officer to retroactively collect taxes in hundreds of cases, although taxation is a complex, demanding and time-consuming task. Performing this task would have taken the customs officer several years. This delay puts the collection of customs duties and import VAT at risk and impairs criminal prosecution. We expect the complex and demanding tax investigations to be followed effectively. The Federal Finance Ministry should duly prioritise this task and provide for an adequate framework to ensure that customs and duties are collected without further delays.


Number of special VAT audits is further declining (reporting item 32)

The number of special VAT audits has declined dramatically for years. The Federal Finance Ministry did not enough to implement our relevant recommendations reported in 2006 and parliamentary demands for action in 2007. As a result, the number of special VAT audits has continued to decline further in subsequent years. In 2017, the national average rate was 1.4 per cent compared to 2 per cent in 2005. This means that, on average, a business will be subject to VAT audit only once every 71 years. This cannot ensure an even taxation and does not deter from VAT fraud. In its oversight function, the Federal Finance Ministry should ensure an adequate number of VAT audits and prescribe a minimum rate for the federal states.


Tax revenues from farm subsidies foregone (reporting item 33)

Lacking data held by the fiscal authorities on agricultural subsidies result in losses of tax revenues. Farmers and forest owners apply for grants at the agricultural offices. We found that data of one out of ten sponsored farms was not available at the tax offices. The tax offices lack relevant data for fully assessing farm income. In their annual tax returns, a number of farmers and forest owners of which the tax office held data had not disclosed any farm subsidies received. This results in high tax losses. In response to our findings a tax office reclaimed €125,000. The federal government level should take prompt action to ensure that farm subsidy data is shared among agricultural offices and tax authorities.

 

Federal Armed Forces

Shortcomings in inventory management of the Armed Forces’ stocks of explosives (reporting item 25)

The Armed Forces have no full overview of its stocks of explosives. They operate a centralised database which does neither disclose the total number of explosives nor all their locations. The Armed Forces also failed to centrally record the stocks of an agency responsible for research and testing of explosives. This poses the risk that monitoring of the operational status is limited to those explosives included in the central database. To ensure full inventory management of explosives the Federal Ministry of Defence should take action to update the database. All and any explosives held by the Armed Forces need to be recorded centrally.

 

Savings potential of €52 million or more in the procurement of ambulance vehicles for the Armed Forces (reporting item 26)

The Armed Forces can save €52 million or more by reducing requirements of new ambulance vehicles and by equipping these with less support items. The Armed Forces are planning to purchase 240 new ambulance vehicles to replace its current aging fleet for the medical care of soldiers in Germany. Data on capacity utilisation covering the last three years indicate a current need for 200 new vehicles only. This number also provides for a fleet reserve. To harness the ambulance vehicles for operation in Germany, the Armed Forces intend to rely on the same standards as for those vehicles designed for operations abroad. Ambulance vehicles for missions abroad are subject to special requirements. Equipped with advanced technology, each of them costs €190,000 more than vehicles with basic equipment. To provide adequate medical care to soldiers in Germany, vehicles need basic harness and equipment only. Procuring such ambulance vehicles will enable the Armed Forces to save at least €52 million.

 

Operational readiness of HF radio broadcasting teams at risk: Armed Forces lack staff and high-tech equipment (reporting item 27)

The Federal Ministry of Defence has tolerated staffing shortages and lacking operational readiness of HF radio broadcasting teams for years. As early as in the year 2009 we noted our concern on the disastrous condition. In 2010, the Ministry pledged to enhance operational readiness by reducing the number of teams significantly and by phasing out and disposing of the assets not needed any more. The Ministry did not keep its promise. Although by the year 2017, the number of radio transmission teams had been reduced from 500 to 45, the remaining teams were not assigned a sufficient number of adequately skilled specialist staff. As a result, in the year 2017, merely 12 teams were fully operational. Inappropriate storage of the assets for a number of years, some of them in unsheltered outdoor areas that were not fenced off, led to losses in value and to excess storage costs. We expect the Armed Forces to take swift action to dispose of discarded assets, to maintain only few teams for operational readiness and to initiate steps – that should have been taken earlier – for covering needs by a reliable successor system.

 

IT security at risk (reporting item 24)

The Armed Forces have been aware for years of IT security risks persisting at subordinate units of the Federal Office for Armed Forces Equipment, Information Technology and In-Service Support. Such shortcomings jeopardise analysing and assessing the assets designed for use by the Armed Forces. The Office failed to develop a framework on protecting operations and data from security risks. No relevant strategies and detailed requirements have been defined and no IT specialist staff is in place. The staffing shortage can result in malware infections of the IT systems since no updates are installed at the offices. The Federal Office has so far not made sufficient efforts to mitigate the risks we stated. We expect the Ministry to promptly address the IT security shortcomings and to provide for specialist staff.

 

Road works

Costly location without added value (reporting item 20)

The Federal Ministry for Transport and Digital Infrastructure intends to spend €3.4 million on a pilot project at an unsuitable location. The Federal Transport Ministry is planning to build an adaptive traffic control system as a pilot on German federal motorway A 93 near the town of Oberaudorf. The system serves to monitor air pollution and in case of risk to lower traffic speed accordingly. The pilot project serves to ascertain what impact such a speed limit has on air pollution. This is to ensure that legal limits are adhered to. The intended location is, however, unsuitable for this purpose because applicable pollution thresholds have been complied with there anyway since 2016. The Ministry would be well advised not to launch the project at this location.

 

Public transport

Millions of excess grants for local public transport stations and stops (reporting item 18)

Since applicable standards have been lacking, the Federal Ministry for Transport and Digital Infrastructure has provided several millions of excess grants for local public transport stations and stops. Uniform standards for stations and stops, the width of stairs and costs for roofs, or a maximum amount per square meter for trim panels and pavements would have avoided overfunding. However, the Ministry approved costs that were up to three times higher than those payment ceilings applicable to rapid transit railway and regional trains of the German railway company. In the case of German railway projects, the Ministry applies uniform standards and co-funding ceilings in determining the amount of its financial support. The Ministry may also give grants towards local public transport projects. Such grants are, however, limited to keeping the respective traffic installations functional. Expenditures in excess of these limits will have to be borne by the federal states and municipalities concerned. Uniform standards and grant ceilings would make it easier for the Ministry to shape functionality requirements and avoid excess funding.

 

Foreign affairs

Urgent need to enhance grant-awarding practices (reporting item 4)

The Federal Foreign Office does not ensure that grants worth billions of euros are put to efficient and effective use. The Office neither has full overview of all grants funded from its departmental budget nor of the status of grant processing. Since 2006, the Federal Foreign Office has partially delegated highly sophisticated grant processing to the Federal Administrative Office. The Federal Foreign Office neither has clear and convincing rules in place for the delegation of authority nor has it assessed the staffing needed for the tasks. Performance of those grant-processing tasks retained by the Federal Foreign Office has also been characterised by major shortcomings for a longer period. Over the years, workload backlogs have accumulated. As of May 2018, proof of proper use of funds totalling €2.46 billion still has not been verified by the Office. We already noted our concern on the shortcomings in grant processing in earlier audit missions, most recently in 2016. However, no meaningful change for the better has come about. Against the background of a continuously rising number of grants and the persistent backlogs, the Federal Foreign Office needs to take rigorous and rapid action.

 

Development cooperation

Covert funding (reporting item 29)

The Federal Ministry of Economic Cooperation and Development masked funding of €3.75 million for expanding a private international school in Bonn. The Ministry channelled funds earmarked for development policy via an international organisation which directly passed them on to the school. The Ministry failed to issue a grant notice and did not demand an economic feasibility study. Also the Ministry did not impose any requirements on building specifications or public tendering of construction services. The Ministry will need to comply with the applicable principles of grant processing and public sector financial management if it intends to pursue grant funding in the future. We expressed concern about this grant as being inadmissible under budgetary law and doubtful in terms of constitutional law because educational matters come within the remit of the federal states.

 

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