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participate in the Finanzausgleich system since 1994 only. The federal government took over the debt
of the former GDR states, and this increased public debt by about 9% in GDP. However, as this
mainly reflected an accounting issue, the national accounts and the Maastricht definition of
deficit/debt allowed including this amount in public debt directly, without having an effect on the
deficit of that year. That is the reason why there is a jump in the 1995 data for general government
debt, but not for the deficit. The absorption of debt of some Lander by the central government has
direct implications for their fiscal relations. Nonetheless, we preferred using the data provided by
OECD instead of calculating back the deficit ratio ourselves. This has also been common practice in
several other papers on German fiscal policy (Berger and Holler, 2007; Ballabriga and Martinez-
Mongay, 2005; Rodden, 2005; Gali and Perotti, 2003). We finish the sample in 2005 as a major
reform of the German fiscal system has taken place.
We plot in figure 2a the net lending ratios to GDP for the different government tiers in the US. Fiscal
policy in the US is mainly dominated by variations in federal fiscal policy. The constant trend towards
deficits has been reversed under the Clinton Administration to reach surplus in 1998 again. A similar
trend is much less outspoken for state fiscal policies. As a consequence, federal deficits mainly
contribute to the continued rise in public debt (figure 2b). State debt ratios hover around 15 per cent of
GDP. A closer look at the state deficits and debt ratios shows a more varied picture. We have plotted
histograms for both the net lending and debt ratio for the panel of states (figure 3a-b). Notice that all
series are expressed as ratios to gross state product. There is no evident deficit bias. On average, there
is a slight deficit, but the distribution is skewed towards surpluses around ratios that otherwise peak
around zero. The deficits are also not concentrated in a few large borrowers, and it is no surprise then
that there are no outliers in the debt ratio either. The mean debt ratio stands at 14 per cent of gross
state product, and the highest ratio observed (37 per cent) is still low in comparison.15 Apparently,
state fiscal policies are rather well behaved.
German regional policies are as important as the federal budget in determining the overall budget
balance (figure 4a). The aggregate deficit of the Lander has been rather constant since the seventies at
about 1%. Most of the variation in the balance of the general government is due to changes in the
fiscal stance of the federal government. These reflect the strong spending boost of the Brandt
government around 1976, German Reunification (1991) and the consolidation since entry in EMU
(1999). The federal government and the Lander contribute in almost equal proportions of 30 per cent
to the overall debt position. German Reunification has been nearly completely financed by federal
debt issues. In recent years, the federal government contributes about 10 per cent more than the
regional tier (figure 4b).
15 The highest debt ratio (37%) occurred in Utah in 1987, the lowest ratio in South Dakota in 1974 (at 3.34%).
The largest deficit happened in 1999 in Wyoming instead, and the largest surplus in 1975 in Washington DC.
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