Debt Caps in German Federal States: Words and Deeds of Federal State Governments

In 2009 the debt cap in Germany was incorporated into law: as of 2020 the budgets of the German federal states must be structurally balanced. The consolidation strategies currently being launched influence whether a federal state will be able to comply with the debt cap in 2020. A new study by the Ifo Institute shows the extent to which the party political composition of individual federal state governments has determined whether governments consolidated their budgets and which adjustment measures they made. The parties tended to differ in terms of their strategy for consolidating public budgets, at least in public debates over the issue. Descriptive statistics show that federal states with left-wing governments had higher structural budget deficits on average than those with right-wing governments in the period from 2010 to 2014, whereas there is hardly any difference in federal states’ primary deficits. The fact that the federal states’ tax revenues were far higher than expected made it easier to consolidate budgets, and left-wing governments could even present generous budgets without deficits. Although left-wing politicians waxed eloquent in voicing their opposition to the debt cap, they seemed to react to the shift in public opinion in the wake of the financial crisis and pursued a fiscal policy that did not differ significantly from that of right-wing politicians.