Impact of the fiscal equalization system on the fusion of two German federal states

A fusion of Schleswig-Holstein with the City-State of Hamburg would mean revenue losses for both states totalling €1.06 billion or 7.5% of the states' budget. This would result from the distribution effects in the present fiscal equalisation system. The system itself would experience long-term savings of 4% of the total budget. The current system subsidises structures that are harmful to German federalism. A fusion would not only save money but would provide a better structure in spatial-economic terms since policies could be better harmonised between Hamburg and Schleswig-Holstein. Here, the advantages are difficult to quantify, however. A fusion of smaller federal states would also have positive effects for federalism as a whole since the voting problems in the Bundesrat would be reduced and special regulations in the fiscal equalization scheme could be eliminated. It thus paradoxical that the existing fiscal federal system punishes the states that could merge instead of encouraging such alliances.