Subnational government bailouts in Germany

The paper presents an investigation of subnational government bailouts in Germany. In a first part we briefly describe the fiscal federalism system in Germany. The main part of the paper examines the bailout of two West German states. We identify the causes of the financial trouble of both states and examine the institutional settings that forced the federal government to provide bailout transfers. In addition, we investigate the impact these transfers had on the fiscal performance of both Länder. In a further section we provide evidence on bailouts of local governments by the German Länder. A final section summarizes our results and presents policy conclusions. --

Subnational Bailouts in Germany

This paper presents an investigation of subnational government bailouts in Germany. In the first part we briefly describe the system of fiscal federalism in Germany. The main part of the paper examines the bailout of two West German states. We identify the causes of the financial crisis in both states and examine the institutional settings as well as the ruling of the Constitutional Court that forced the federal government to provide bailout transfers. In addition, we investigate the impact these transfers had on the fiscal performance of both states. In a further section we provide evidence on bailouts of local governments by German states. A final section summarizes our results and presents policy conclusions.

Public capital and the demand for private inputs

The paper investigates the impact the provision of public capital has on the demand for private capital and labour using a cost function with public capital included as a fixed unpaid factor of production. Special attention is paid to the examination of the influence tax vs. debt financing of public investment might have on the demand for private capital. The model is applied to a panel of 31 2-digit industries of the West German manufacturing industry. It is shown, that private and public capital are complements whereas a substitutive relation emerges for labour and public capital. Decomposing the adjustment of the demand for private labour and capital reveals a stabilizing but steadily decreasing impact of public capital on private inputs. --

Minimum Standards, Fixed Costs and Taxing Autonomy of SubnationalGovernments

The paper examines the question how fiscally strong and fiscally weak states respond to taxing autonomy at the state level, a subject that is currently under debate in Germany where states do have virtually no power to tax. We use a simple theoretical model that incorporates state surtaxes on the federal income tax bill taking into account fixed costs as well as minimum standards for the provision of public services. We show that both factors work in the direction of forcing fiscally weak states to collect higher surtaxes as compared to fiscally strong states. The empirical section presents evidence on the importance of fixed costs at the state level and calculates the distributional effects of taxing autonomy taking feedbacks of the fiscal equalization system into account. In addition simple estimates of the importance of spending on minimum standards are derived.fiscal federalism, minimum standards, tax autonomy, fiscal equalization

The impact of the provision of public infrastructures on regional economic development in Germany

The present paper presents an analysis of the impact of public infrastructure capital on regional economic developments in Germany. After presenting some descriptive statistical data on the economies of the 11 regions in (West) Germany a simple theoretical model of a cost-minimizing firm is presented in which the stock of public capital is included as a proxy for public services provided to firms as a fixed unpaid factor of production. Duality theory is used to recover the productivity effects of public infrastructures by calculating the cost-saving effects that are associated with public services. It is shown that these cost-saving effects work their way through adjustments in the demand for private inputs. Using a translog cost 'function we present panel estimates for the 11 federal states of (West) Germany with labour, structures and equipment as private factors of production. The results strongly indicate that public capital formation encourages private investment. In addition, it is demonstrated empirically that with respect to private capital a distinction between structures and equipment is of crucial importance because the effects on the former are of far greater importance than the effects on the latter. --

Fiscal Federalism and Demography

The paper examines the effects of demographic change on federal, state and local governments in Germany with a focus on the expenditure side to answer the question, whether demographic change will induce vertical fiscal expenditure imbalances. We present estimates of the impact of demographic change on public spending based on a decomposition of expenditures into almost 30 categories (functions). Our results suggest that demographic change will indeed result in significant vertical expenditure imbalances between the federal and the subnational government sector as well as within the subnational government sector. In addition, the estimates show that the structure of expenditures by function has to be adjusted considerably in order to avoid deficits as demographically induced increases in expenditures in some important functions, such as pension payments, have to be counterbalanced by exploiting potential savings that arise from demographic change in other functions. --fiscal federalism,demographic change,vertical fiscal expenditure imbalances

Regional productivity growth and investments in public infrastructure: the case of Germany

This paper examines whether the productivity growth in the West-German states is influenced by the provision of public infrastructure. Medium-term labour productivity growth and output growth varies a lot between German states. This differences are more pronounced during the eighties. The traditional total factor productivity shows a smaller difference than labour productivity. The regional differences in the productivity growth rates can only partly be attributed to the differences in factor input growth. We estimate a translog-cost-function for the period 1970-1988 for 11 German states using a three-equation fixed-effects panel data model. We show that there are important cost-saving effects that are associated with public services. Likewise, the demand for labour, and the private investment demand for structures and equipment is effected by public capital goods. Our estimates indicate that public capital formation encourages private investment. This effect is especially strong with respect to the private demand for structures. These results confirm that regional or urban economic growth can be forstered by the government by public investment. --

Fiscal federalism and risk sharing in Germany: the role of size differences

We study the effect of size differences for an optimal risk sharing system of intergovernmental transfers in Germany. The German fiscal transfer system should account for the fact that an optimal insurance mechanism has the property that smaller states contribute a smaller share of their tax revenue to the redistribution mechanism. -- Wir betrachten die Rolle von Größenunterschieden von Gebietskörperschaften für einen optimalen Risikoausgleich im Rahmen eines föderalen Finanzausgleichs in Deutschland. Zunächst wird der Spielraum für einen möglichen Risikoausgleich durch interregionale Ausgleichszahlungen zwischen Gebietskörperschaften in Deutschland analysiert. Es zeigt sich, dass unsystematische Risiken insbesondere aus längerfristigen Entwicklungsunterschieden bestehen. Für das optimale Transfersystem sollte angesichts möglicher Anreizwirkungen solcher Systeme gelten, dass homogene Gebietskörperschaften einen um so größeren Anteil ihres Steueraufkommens in das interregionale Transfersystem einbringen sollten, je größer sie sind.Fiscal federalism,risk sharing,size asymmetry

Der Arbeitsmarkt in Brandenburg : aktuelle Entwicklungen und zukünftige Herausforderungen

Die vorliegende Analyse untersucht die Entwicklungen am Arbeitsmarkt von Brandenburg auf regionaler und sektoraler Ebene mit dem Ziel, die Stärken und Schwächen der Wirtschaft des Landes Brandenburg aufzuzeigen und zukünftige Entwicklungstrends zu identifizieren. Hierbei werden wir auf der einen Seite die interregionalen Disparitäten im Land Brandenburg herausarbeiten und auf der anderen Seite zentrale ökonomische Grunddaten über die ostdeutschen Länder vergleichen. Letzterer Aspekt soll helfen spezifische Entwicklungsvor- und -nachteile Brandenburgs herauszuarbeiten. Bewusst wird hierbei weitgehend auf einen Vergleich mit Westdeutschland verzichtet, da dieser Vergleich - angesichts der jungen marktwirtschaftlichen Historie der Neuen Bundesländer - kaum sinnvoll ist. Solche Ost-West-Vergleiche werden immer mit der Hintergrundfrage "was muss in Ostdeutschland noch geschehen, um nicht vom westdeutschen Durchschnitt abzuweichen?" durchgeführt. Dieses Ziel ist zwar im Hinblick auf die Angleichung der Lebensverhältnisse erstrebenswert und auch grundgesetzlich festgeschrieben, aber es schließt natürlich nicht aus, dass in Ostdeutschland auf Dauer andere wirtschaftliche Gegebenheiten als in Westdeutschland vorliegen können, so z. B. im Hinblick auf die sektorale Wirtschaftsstruktur, das Erwerbsbeteiligungsverhalten oder auch das Konsumverhalten. Der Beitrag behandelt zwei zentrale Themenbereiche. Zunächst widmet er sich der Analyse der Beschäftigungsentwicklung in Brandenburg im Vergleich zur Situation in den anderen ostdeutschen Ländern. Ein besonderes Augenmerk soll hierbei der Entwicklung des in der Diskussion oft vernachlässigten öffentlichen Sektors gelten, da dieser Bereich nach der Wende vor ebenso großen Anpassungsproblemen gestanden hat wie der privatwirtschaftliche Bereich. Ferner soll das Ausmaß der Unterbeschäftigung über die Neuen Bundesländer hinweg verglichen werden. Mit der Analyse der regionalen Disparitäten in Brandenburg beschäftigen wir uns in einem zweiten Hauptabschnitt. Hierbei geht es insbesondere darum, die Wachstumsregionen aber auch die Problemregionen Brandenburgs zu identifizieren, um hieraus mögliche wirtschaftspolitische Handlungsperspektiven abzuleiten. In beiden Analyseteilen verfolgen wir einen sehr breiten Ansatz, der bewusst - wenn auch häufig nur in Randbemerkungen und Fußnoten - über den engen Betrachtungsrahmen des Arbeitsmarktes hinausgeht, da Arbeitsmarktprobleme nicht isoliert von anderen Politik- und Problembereichen gesehen werden können. Ein letzter Abschnitt fasst unsere Ergebnisse nochmals zusammen und erörtert - soweit dies in den anderen Teilbereichen noch nicht geschehen ist - unsere Schlussfolgerungen, die wir aus der vorgetragenen Diagnose ableiten

Demographic Change and Public Sector Budgets in a Federal System

This paper examines the effects of demographic change on public finances in a federal system. We develop a simple methodical procedure to measure the effect of demographic changes on public revenues and expenditures. We apply our method to the local, state and federal government sector as well as on the social security system in Germany. Our results suggest that demographic change will lead to significant vertical fiscal imbalances between the different layers of government. In addition we show, that subnational governments can generate a demographic dividend whereas the social security system and the federal government have to carry an additional burden due to ageing.fiscal federalism, demographic change, sustainability of public finances