Fiscal Sustainability Across Government Tiers



XREAP2007-14

(‘Ladefnamzausgleich’) is explicitly written into the German Constitution.12 These are further
complemented with vertical transfers from the federal level to further reduce economic disparities and
finance specific tasks.13 A second consequence of fiscal homogeneity is a strong degree of fiscal
harmonisation that reduces the possibility of Lander to adjust tax revenues. US states can count on
nearly 80% of adjustable tax revenues and share tax agreements for only 20%. In contrast, German
Lander have full competence over about 20% of tax revenues only (figure 1c).

3.2. Data

Fiscal policy data for the US come from two sources. General government data, and its division in
federal and state government data, come from the NIPA accounts at the Bureau of Economic Analysis.
Detailed data on state fiscal policies come from the Census State Governments Finance Database.
These data cover fifty US state and local governments. Since 2001, consolidated data are not available
anymore, and we therefore limit the sample to the period 1963-2000. This gives us a balanced panel of
annual data with 1938 observations.

Data on German fiscal policies come from different sources. General government series are from the
OECD. Data for the central government are available from the Public Finances Series of the
Stctistisches Bundescmt (Fachserie 14, Reihe 3.1). Regional budget data were provided by the
Ministry of Finance, which are also the data provided to the OECD for their studies on fiscal
federalism (Wurzel, 1999). The surplus measures the net absorption of credit on financial markets, by
both the Lander and the towns in every Land. Land GDP comes from the revised data from the
Volkswirtschcftliche Gescmtrechnungen der Lander. Fiscal data are consolidated across Lander and
towns. Data cover the sample 1970-2005. There are some notorious breaks in German fiscal policy.14
First of all, the Reunification of Germany urges us to consider some different sample periods. We
control for the shift in data with an impulse dummy and a time trend as of 1991 when we consider the
full sample. In addition, we consider two different sample periods: 1970-1990 for the old Lander;
1991-2005 for both new and old Lander. Nonetheless, the former Eastern German Lander started to

12 No German government tier has direct decision power on tax rates, but needs agreements with all other tiers
before rates can be changed for the entire federation. Only a quarter of regional revenues are earmarked to one
tier of government only whereas the remaining three quarters of all revenues are shared with the other units of
government. This leaves the states with little flexibility on the revenue side of the budget.

13 Horizontal transfers are shared VAT-revenues so that each state reaches at least 92% of average fiscal
capacity. Additional vertical transfers compensate for the cost of political administration, smooth the transitional
losses and gains for the various states after Reunification, and - importantly - contribute to the consolidation of
debt in Bremen and Saarland. The latter vertical grants account for 10% of total revenues for the West German
states, but this amounts up to 40% for the new states. The horizontal grants reduce on average 4% of revenues in
the West German states, to add up to 7% of extra fiscal capacity in the East. See Seitz (1999) and Fitch IBCA
(2005) for more details.

14 We cleaned the German data for the sale of the UMTS licenses, which had an unusually large budget impact in
2000.

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