Brief Expertise “Time Frame for the Further Reduction of the Solidarity Surcharge 1995“

Tasks

On behalf of the German Federal Ministry of Finance (BMF), the Dresden branch of the ifo Institute was investigating the continuing additional financial burdens on the federal government as a result of reunification as well as their future development until 2030. The aim was to estimate the time frame for the further reduction of the solidarity surcharge. The project was being conducted in cooperation with the ifo Center for Public Finance and Political Economy and the German Institute for Economic Research (DIW Berlin).

Methods

First of all, the (specific) payments of the federal government and the social insurance funds to East Germany for the period 2005-2020 were determined, since no statistical data is available for this period.
In a second step, scenarios for the future development of tax revenue in the territorial states and city states were calculated, as well as the further financial flows resulting from the applicable tax distribution regulations. Finally, based on current political decisions, the current legal status and basic assumptions on economic development, the expenses incurred at the federal level as a result of reunification were estimated until 2030. The comparison of the projected revenue and expenditure allows us to deduce the extent to which a disproportionate burden on the federal government will persist.

Data and other sources

VGR Working Group of the Federal States (2018 and 2019)
Blum, Ulrich; Ragnitz, Joachim; Freye, Sabine; Scharfe, Simone; Schneider, Lutz (2009)
Federal Employment Agency (2020)
Federal Ministry of Finance (various years)
Federal Statistical Office (various years)

Results

Burdens directly related to reunification could hardly be identified at the state level. Although the East German states are still financially weak, these are typical budget problems that can also be found among financially weak West German states and municipalities. On the federal level, on the other hand, calculations indicate that in 2020 unification-related additional burdens will amount to around twelve billion euros. By 2030 the additional burdens will decrease to 11.2 billion euros. On the basis of the tax revenues estimated in the base scenario, the solidarity surcharge will generate revenues of 20.2 billion euros in 2020. In 2021, they will amount to 11.4 billion euros, rising again to 17.6 billion euros by 2030. The effects of the Corona crisis on tax revenues and on the solidarity surcharge have not yet been taken into account in this study. Revenues from the solidarity surcharge are thus likely to be overestimated and are therefore unlikely to exceed the disproportionate burden until the second half of the 2020s.