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State government finances in good shape in 2021 and 2022

The budgets of the state governments and their local governments shaped up very well in the second year of the coronavirus pandemic,” the Bundesbank writes in its Monthly Report. According to the publication, they recorded an overall surplus of €5 billion in 2021 after posting a deficit of €32 billion in 2020. The excellent outturn was reported as being made possible by strong growth in tax revenue and central government’s near-wholesale assumption of pandemic-related expenditure. From a structural perspective – stripping out the unfavourable effects of the cyclical component, financial transactions and temporary coronavirus-related spending – the surplus was significantly higher still.

Balances vary considerably from state to state

In their article, the Bundesbank’s experts also present the results for the individual federal states. These show that half of all federal states were able to close 2021 with a surplus. Rhineland-Palatinate, home to the main site of a vaccine manufacturer, recorded the highest per capita surplus (€710), while the largest per capita deficit (€570) was posted by Berlin. All state government budgets were at the very least structurally balanced – even without the temporary coronavirus-related expenditure being factored out.

Calculations point to high levels of reserve formation from emergency borrowing

According to the article, despite the favourable state of their finances, state governments made use of emergency borrowing totalling €18 billion under their respective debt brakes in 2021. The Bundesbank’s calculations indicate that they used a large part of these funds to top up reserves with which future budgets can be financed. Looking at the figures, only a small portion of this was needed to close funding gaps in core budgets and off-budget entities. “However, using emergency loans to build up reserves seems questionable,” in the experts’ assessment. They point out that emergency borrowing from the coronavirus crisis was intended only to finance measures aimed at addressing the specific crisis, not to finance non-crisis expenditure further down the road. They do not see any need for further emergency borrowing this year, continuing, “Instead, in a better-than-anticipated financial situation, it would be more prudent to take out fewer emergency loans or repay existing ones.

Outlook uncertain, but good starting position

The experts further report that, as a result of the war in Ukraine and the associated energy crisis, the outlook is extremely uncertain. That said, intra-year budgetary data have so far indicated strong further improvement this year, and the reserves reported by the federal states amount to around €110 billion. The federal states thus began the new year with a good starting position, the experts continue, with central government additionally assuming the lion’s share of expenditure stemming from the Ukraine war and the energy crisis. They state, “The good financial situation should enable the federal states to make a considerable contribution to the current financial challenges.

The Bundesbank is highly critical of the lack of transparency surrounding individual federal states’ finances, citing difficulties comparing federal states’ data not least due to their different methods of recording identical forms of expenditure as well as the diversity of rules in state-specific debt brakes. In addition, important budgetary data are published with a major time lag in some cases. As the experts write, the Stability Council, in particular, remains tasked with making substantial progress with respect to transparency, comparability and timely publication.