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Federal Performance Commissioner makes available information on the situation of federal finances

The Federal Performance Commissioner has communicated fact sheets on the situation of federal finances to the parliamentary Budget Committee.
Apr 08, 2021

Lage der Bundesfinanzen

The federal finances are still suffering under the strain caused by the COVID-19 pandemic. Federal debt levels in particular reflect the severe financial situation. From 2020 to 2022, federal borrowing has soared from zero to more than €450 billion. This has triggered an enormous debt avalanche. It is unrealistic to believe that economic growth alone will ensure curbing public debt. Specific fiscal programmes and structural reforms are needed to restore the leeway the government needs to act in the aftermath of the pandemic.

The Federal Performance Commissioner has studied the federal cabinet resolution adopted on 24 March 2021 on targeted budget figures and informed the parliamentary Budget Committee on the situation of federal finances.


Lage der Bundesfinanzen

Restore the government’s leeway to act after the pandemic

Rigorous fiscal programmes and structural reforms are needed to address soaring public debt

"The federal finances are still under the strain caused by the COVID-19 pandemic. Returning back to normal and paying off debt at the same time is no option for such unprecedented debt levels. Interest rates cannot fall any further and a return to pre-crisis ever-increasing tax revenues cannot reasonably be expected at this point of time," said Kay Scheller, President of the German SAI, in his capacity as Federal Performance Commissioner. When commenting on the situation of the federal finances he added: "Now we are experiencing the impact of lacking reforms in the aftermath of the global financial and economic crisis. The headroom available then was not adequately used for proactive future provisions. Today, these options are no longer available."

The federal government's resolution on targeted budget figures fully exposes the weak foundations of federal budget as a result of the coronavirus pandemic. The federal government's budgetary decisions in the crisis are of little sustainability. There are more supplementary budgets than ever before. "Government funds are not available indefinitely and not for every purpose," said Mr. Scheller. "Without structural reforms, it will not be possible to cushion the financial impact of the coronavirus pandemic."

The weak financial situation is especially reflected in the level of federal debt. From 2020 to 2022, borrowing will explode from zero to over €450 billion. Current federal debt has reached a level of almost half the amount accumulated over the past 70 years. In three financial years, the government has incurred more new borrowing than over the past 20 years. Since the beginning of the pandemic, the government has built on the principle that more helps more. Kay Scheller stated: "The government must now do everything to ensure that the financial assistance made available actually reaches those in need and works as projected. This is the best remedy against ever-increasing borrowing needs," said Kay Scheller.

In the new 2023 to 2025 financial planning period, there are considerable funding gaps of some €86 billion. The general reserve of €48 billion covers only half of this amount. Expected funding needs for defence or economic cooperation purposes have not even been provided for. This implies that the pandemic will have long-lasting financial impacts on federal finances for many more years to come. With its decision on targeted budget figures, the federal government has placed a questionable burden on the next government.

We recommend returning to sound planning and a balanced budget policy. The federal budget needs to be balanced over the medium term. The financial burdens and challenges are enormous and include ageing society, sustainable climate protection, digital transformation and education, reform of infrastructures and commitments at Union level. "A major portion of the structural problems date back to the time before the pandemic," Kay Scheller stated.

This will be a Herculean task for the next government. The situation is extremely serious. The federal budget has reached much worse levels than in the aftermath of the financial and economic crisis, although the debt ratio is currently still lower than at that time. Economic growth alone will be of little help in tackling the crisis and public debt. Unlike in 2010, interest rates are already at rock bottom. The government can no longer regain enough leeway of fiscal policy. This also applies to the labour market, which was doing well until the pandemic. Nor can the government count on a rapid and steady increase in tax revenues. This time, the overall economy has been hit much more severely than was the case before.

As a result, the government needs to opt for a proactive approach and take rigorous leadership to balance and consolidate the budget. Such efforts should include reviewing tax subsidies and tax relief, better targeting social security payments, and properly prioritising budget items. This means a spending moratorium with focusing on federal core tasks and securing tax revenues for example by effectively combating VAT fraud.

Given this difficult fiscal situation, the debt rule must remain in place. The debt rule protects the leeway and is fundamentally democratic, because future generations should be able to shape their budgets in a self-determined manner. And future parliaments should preserve their sovereignty and prerogative power of decision-making. Abolishing or undermining this power would make parliament a toothless tiger. This would mean nothing less than fiscal capitulation and jeopardise long-term sustainability of federal finances. The debt rule gives a positive signal to the financial markets. Germany will remain the anchor of stability in the euro area and can therefore repay debt at extremely favourable rates. Putting all this at stake might adversely impact on financing conditions and make financial leeway even more restricted in the euro area.

On 08 April 2021, in his capacity as Federal Performance Commissioner, Kay Scheller, the President of the German SAI, communicated to the parliamentary Budget Committee fact sheets on the situation of federal finances. This analysis is based on the decision adopted by the federal government on 24 March 2021 on the draft supplementary 2021 budget and on the medium-term target figures for the draft 2022 budget estimate and medium-term financial planning up to the year 2025.

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