Medium-term Financial Planning in the Federal Republic of Germany
Medium-term Financial Planning in the Federal Republic of Germany
Medium-term Financial Planning in the Federal Republic of Germany
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<strong>Medium</strong>-<strong>term</strong> <strong>F<strong>in</strong>ancial</strong> <strong>Plann<strong>in</strong>g</strong> <strong>in</strong> <strong>the</strong> <strong>Federal</strong><br />
<strong>Republic</strong> <strong>of</strong> <strong>Germany</strong><br />
ASTRID LÜBKE<br />
<strong>Federal</strong> M<strong>in</strong>istry <strong>of</strong> F<strong>in</strong>ance, Berl<strong>in</strong><br />
Abstract<br />
Recibido: Enero 2008<br />
Aceptado: Enero 2008<br />
<strong>Medium</strong>-<strong>term</strong> f<strong>in</strong>ancial plann<strong>in</strong>g <strong>in</strong> <strong>the</strong> federal republic <strong>of</strong> germany has proved to be an effective <strong>in</strong>strument <strong>in</strong> <strong>the</strong><br />
quest for a stable fiscal policy.<br />
It is based essentially on <strong>the</strong> fact that each <strong>of</strong> <strong>the</strong> approximately 6,000 revenue and expenditure titles are re-evaluated<br />
at <strong>the</strong> start <strong>of</strong> <strong>the</strong> budget preparation procedure and planned for <strong>the</strong> next four years, tak<strong>in</strong>g <strong>in</strong>to account <strong>the</strong> expected<br />
risks. At <strong>the</strong> same time <strong>the</strong> <strong>Federal</strong> M<strong>in</strong>istry <strong>of</strong> F<strong>in</strong>ance evaluates <strong>the</strong> overall economic situation <strong>of</strong> <strong>the</strong> country on <strong>the</strong><br />
basis <strong>of</strong> <strong>the</strong> macroeconomic data. In this way <strong>the</strong> German federal government ga<strong>in</strong>s an exact picture which is de<strong>term</strong><strong>in</strong>ed<br />
by <strong>the</strong> macroeconomic climate and which also takes detailed account <strong>of</strong> future revenue and expenditure.<br />
On <strong>the</strong> one hand, <strong>the</strong> analysis <strong>of</strong> <strong>the</strong>se data makes it possible to identify any fiscal policy action which needs to be taken<br />
by <strong>the</strong> government. On <strong>the</strong> o<strong>the</strong>r hand, from <strong>the</strong> negotiation <strong>of</strong> <strong>the</strong> f<strong>in</strong>ancial plan with <strong>the</strong> departments <strong>in</strong> <strong>the</strong> budget<br />
preparation procedure <strong>the</strong>re emerges a target specification on <strong>the</strong> expenditure ceil<strong>in</strong>gs for <strong>the</strong> com<strong>in</strong>g years. The<br />
f<strong>in</strong>ancial plan forms <strong>the</strong> basis for <strong>the</strong> budget preparation and facilitates <strong>the</strong> budget negotiations <strong>in</strong> <strong>the</strong> follow<strong>in</strong>g<br />
years.<br />
Key words: <strong>Medium</strong>-<strong>term</strong> f<strong>in</strong>ancial plann<strong>in</strong>g, budget preparation, expected risks, future revenues, fiscal policy action,<br />
f<strong>in</strong>ancial plan, expenditure carl<strong>in</strong>gs.<br />
Resumen<br />
El presente trabajo estudia la programación f<strong>in</strong>anciera de medio plazo en el ámbito de la Adm<strong>in</strong>istración Pública en<br />
la República <strong>Federal</strong> de Alemania. La programación a medio plazo ha resultado ser un <strong>in</strong>strumento efectivo para el<br />
manejo de la política fiscal. Ello es debido a la evaluación sistemática que se realiza de los capítulos de gastos e <strong>in</strong>gresos<br />
durante la preparación del presupuesto y los planes para los próximos cuatro años teniendo en cuenta los riesgos<br />
potenciales.<br />
Este ejercicio permite, por una parte, identificar posibles acciones fiscales; y por otra, a través de la negociación del<br />
plan f<strong>in</strong>anciero con los departamentos, establecer los techos de gasto para los próximos años.<br />
Clasificación JEL: H62, H72, H74, H77.<br />
Presupuesto y Gasto Público 51/2008: 133-144<br />
Secretaría General de Presupuestos y Gastos<br />
© 2008, Instituto de Estudios Fiscales
134 Astrid Lübke<br />
A. Pr<strong>in</strong>ciples <strong>of</strong> medium-<strong>term</strong> f<strong>in</strong>ancial plann<strong>in</strong>g<br />
1. Historical development<br />
The 1969 budget reform saw medium-<strong>term</strong> f<strong>in</strong>ancial plann<strong>in</strong>g <strong>in</strong>troduced for <strong>the</strong> first<br />
time <strong>in</strong>to budget law. This reform created a mandatory, standardised framework for <strong>the</strong> budget<br />
law <strong>of</strong> central and regional government. For one th<strong>in</strong>g, <strong>the</strong> budget provisions <strong>in</strong> <strong>the</strong> Basic<br />
Law <strong>of</strong> <strong>the</strong> <strong>Federal</strong> <strong>Republic</strong> <strong>of</strong> <strong>Germany</strong> (Articles 109 to 115 <strong>of</strong> <strong>the</strong> Grundgesetz, or GG)<br />
were revised. For ano<strong>the</strong>r, <strong>the</strong> Budget Pr<strong>in</strong>ciples Act (Haushaltsgrundsätzegesetz, or HGrG)<br />
was passed. The Budget Pr<strong>in</strong>ciples Act conta<strong>in</strong>s <strong>the</strong> common pr<strong>in</strong>ciples which <strong>the</strong> federal<br />
government and <strong>the</strong> Länder must follow <strong>in</strong> manag<strong>in</strong>g <strong>the</strong>ir respective budgets. The Budget<br />
Pr<strong>in</strong>ciples Act provides <strong>the</strong> substructure upon which are built both <strong>the</strong> <strong>Federal</strong> Budget Code<br />
<strong>of</strong> <strong>the</strong> German federal government (Bundeshaushaltsordnung, or BHO), and <strong>the</strong> regional<br />
budget codes (Landeshaushaltsordnungen, or LHO) <strong>of</strong> all <strong>the</strong> federal states (Länder) <strong>of</strong> <strong>the</strong><br />
<strong>Federal</strong> <strong>Republic</strong> <strong>of</strong> <strong>Germany</strong>.<br />
In essence, <strong>the</strong> budget reform <strong>in</strong>troduced <strong>the</strong> follow<strong>in</strong>g changes:<br />
� In <strong>the</strong>ir budget management, <strong>the</strong> Federation and <strong>the</strong> Länder have to take <strong>in</strong>to account<br />
<strong>the</strong> requirements <strong>of</strong> macroeconomic equilibrium (price stability, high level <strong>of</strong> employment,<br />
equilibrium <strong>in</strong> <strong>the</strong> balance <strong>of</strong> payments, and constant and appropriate economic<br />
growth) 1 (Article 109(2) GG).<br />
� Revenue from borrow<strong>in</strong>g may not exceed <strong>the</strong> total expenditure for <strong>in</strong>vestment provided<br />
for <strong>in</strong> <strong>the</strong> budget estimates (Article 115 GG). Exceptions to this rule are permissible only<br />
to remedy a serious and susta<strong>in</strong>ed disturbance <strong>of</strong> macroeconomic equilibrium.<br />
� The Federation and <strong>the</strong> Länder each base <strong>the</strong>ir respective budget management on a<br />
f<strong>in</strong>ancial plan cover<strong>in</strong>g a five-year period (section 50 HGrG).<br />
� A f<strong>in</strong>ancial plann<strong>in</strong>g council chaired by <strong>the</strong> <strong>Federal</strong> M<strong>in</strong>istry <strong>of</strong> F<strong>in</strong>ance (FMF) was<br />
set up to submit recommendations for co-ord<strong>in</strong>at<strong>in</strong>g <strong>the</strong> f<strong>in</strong>ancial plans <strong>of</strong> <strong>the</strong> Federation,<br />
<strong>the</strong> Länder, <strong>the</strong> communes and associations <strong>of</strong> communes (section 51 HGrG).<br />
� In order to ensure that <strong>the</strong> budgets <strong>of</strong> <strong>the</strong> federal government, <strong>the</strong> Länder and <strong>the</strong> local<br />
authorities can be judged by uniform criteria, a standardised budget system was<br />
developed with <strong>the</strong> follow<strong>in</strong>g characteristics:<br />
— system <strong>of</strong> classification by object: a three-tiered list; revenue and expenditure are<br />
classified by categories (for example tax revenue, staff expenditure, <strong>in</strong>terest payments<br />
and <strong>in</strong>vestment expenditure)<br />
— system <strong>of</strong> classification by function: a three-tiered list; expenditure and revenue<br />
are classified accord<strong>in</strong>g to tasks <strong>of</strong> public adm<strong>in</strong>istration (e.g. defence, environmental<br />
protection and conservation, health).<br />
S<strong>in</strong>ce this reform, adopt<strong>in</strong>g an approach geared to <strong>the</strong> medium-<strong>term</strong> has become a matter<br />
<strong>of</strong> course <strong>in</strong> all sectors <strong>of</strong> budget and fiscal policy. As employed by <strong>the</strong> FMF, <strong>the</strong> f<strong>in</strong>ancial plan<br />
has become a useful tool for fend<strong>in</strong>g <strong>of</strong>f excessive demands on <strong>the</strong> budget. The obligation to<br />
draw up a f<strong>in</strong>ancial plan each year re<strong>in</strong>forces awareness with<strong>in</strong> <strong>the</strong> federal government <strong>of</strong> <strong>the</strong><br />
need for fiscal discipl<strong>in</strong>e and responsible budget policy and helps to ensure a balanced fiscal<br />
policy. In this way, any need for fiscal policy action can be identified at an early stage.
<strong>Medium</strong>-<strong>term</strong> <strong>F<strong>in</strong>ancial</strong> <strong>Plann<strong>in</strong>g</strong> <strong>in</strong> <strong>the</strong> <strong>Federal</strong> <strong>Republic</strong> <strong>of</strong> <strong>Germany</strong> 135<br />
Though f<strong>in</strong>ancial plann<strong>in</strong>g is a valuable <strong>in</strong>strument, it cannot guarantee <strong>the</strong> implementation<br />
<strong>of</strong> a sound fiscal policy.<br />
2. The need for medium-<strong>term</strong> f<strong>in</strong>ancial plann<strong>in</strong>g<br />
<strong>Medium</strong>-<strong>term</strong> f<strong>in</strong>ancial plann<strong>in</strong>g is necessary <strong>in</strong> order to be able<br />
� to take account <strong>of</strong> likely developments <strong>in</strong> public f<strong>in</strong>ance <strong>in</strong> <strong>the</strong> medium <strong>term</strong> when<br />
mak<strong>in</strong>g <strong>the</strong> decisions <strong>in</strong>corporated <strong>in</strong> <strong>the</strong> yearly budget;<br />
� to identify at an early stage <strong>the</strong> f<strong>in</strong>ancial impact <strong>of</strong> new measures, reform projects,<br />
statutes and <strong>the</strong> like;<br />
� to assess <strong>in</strong> good time <strong>the</strong> scope available for fiscal policy action <strong>in</strong> future years;<br />
� to identify <strong>in</strong> good time undesirable fiscal policy trends with longer-<strong>term</strong> impact and<br />
to counter <strong>the</strong>m at an early stage.<br />
3. Object <strong>of</strong> f<strong>in</strong>ancial plann<strong>in</strong>g and plann<strong>in</strong>g period<br />
“<strong>F<strong>in</strong>ancial</strong> plann<strong>in</strong>g” is taken to mean <strong>the</strong> actual process <strong>of</strong> plann<strong>in</strong>g, whilst <strong>the</strong> “f<strong>in</strong>ancial<br />
plan” is <strong>the</strong> outcome <strong>of</strong> this process.<br />
<strong>F<strong>in</strong>ancial</strong> plann<strong>in</strong>g is detailed:<br />
<strong>F<strong>in</strong>ancial</strong> plann<strong>in</strong>g comprises <strong>the</strong> detailed plann<strong>in</strong>g by budget title <strong>of</strong> all <strong>in</strong>dividual revenue<br />
and expenditure positions <strong>in</strong>cluded <strong>in</strong> <strong>the</strong> budget <strong>in</strong> <strong>the</strong> plann<strong>in</strong>g period, that is, not just<br />
aggregate figures for total revenue and expenditure. Currently, <strong>the</strong>se comprise about 1,000<br />
revenue titles and about 5,000 expenditure titles, grouped <strong>in</strong> chapters (for each authority) and<br />
departmental budgets (m<strong>in</strong>istries and subord<strong>in</strong>ate authorities).<br />
<strong>F<strong>in</strong>ancial</strong> plann<strong>in</strong>g is comprehensive:<br />
It <strong>in</strong>cludes expenditure which can already def<strong>in</strong>itely be earmarked, and provision for<br />
risks which loom <strong>in</strong> <strong>the</strong> medium-<strong>term</strong> plann<strong>in</strong>g period. Sound f<strong>in</strong>ancial plann<strong>in</strong>g <strong>in</strong>cludes reserves<br />
as well.<br />
<strong>F<strong>in</strong>ancial</strong> plann<strong>in</strong>g has a macroeconomic orientation:<br />
It is based on <strong>the</strong> medium-<strong>term</strong> projection <strong>of</strong> aggregate economic development produced<br />
by <strong>the</strong> federal government <strong>in</strong> April <strong>of</strong> each year. From this, calculations can be made,<br />
<strong>in</strong> particular, <strong>of</strong> labour market expenditure on <strong>the</strong> spend<strong>in</strong>g side and <strong>of</strong> tax revenue on <strong>the</strong> receipts<br />
side. In addition, for revenue plann<strong>in</strong>g <strong>the</strong> figures produced by <strong>the</strong> Work<strong>in</strong>g Party on<br />
Tax Estimates are also consulted. This work<strong>in</strong>g party consists <strong>of</strong> experts from <strong>the</strong> federal and<br />
regional governments as well as <strong>in</strong>dependent experts.<br />
The f<strong>in</strong>ancial plan is not a fixed five-year plan <strong>of</strong> <strong>the</strong> type used <strong>in</strong> planned economies,<br />
ra<strong>the</strong>r, it is a roll<strong>in</strong>g plan:<br />
Each time <strong>the</strong> budget is prepared, <strong>the</strong> federal government’s f<strong>in</strong>ancial plann<strong>in</strong>g is also<br />
brought up to date by <strong>the</strong> <strong>Federal</strong> M<strong>in</strong>istry <strong>of</strong> F<strong>in</strong>ance and rolled forward by one year. In concrete<br />
<strong>term</strong>s, this means that, with <strong>the</strong> current draft <strong>of</strong> <strong>the</strong> 2008 federal budget, <strong>the</strong> currently<br />
valid 2006-2010 f<strong>in</strong>ancial plan is be<strong>in</strong>g converted <strong>in</strong>to <strong>the</strong> 2007-2008 f<strong>in</strong>ancial plan.
136 Astrid Lübke<br />
The plann<strong>in</strong>g period covers five years:<br />
� <strong>the</strong> current fiscal year (now: 2007)<br />
� <strong>the</strong> draft budget for <strong>the</strong> next fiscal year (now: 2008)<br />
� three more genu<strong>in</strong>e plann<strong>in</strong>g years (now: 2009-2011)<br />
A five-year period has shown itself to be most practicable. A longer plann<strong>in</strong>g period<br />
would <strong>in</strong>volve too many uncerta<strong>in</strong>ties.<br />
In <strong>the</strong> <strong>in</strong>terests <strong>of</strong> comparability, <strong>the</strong> f<strong>in</strong>ancial plan is published accord<strong>in</strong>g to <strong>the</strong> same<br />
system as <strong>the</strong> federal budget. In <strong>the</strong> German f<strong>in</strong>ancial plan as published, expenditure is presented<br />
<strong>in</strong> about 40 categories, which describe <strong>the</strong> tasks <strong>of</strong> <strong>the</strong> public adm<strong>in</strong>istration accord<strong>in</strong>g<br />
to <strong>the</strong>ir classification by function. However, all medium-<strong>term</strong> plann<strong>in</strong>g data on roughly<br />
5,000 expenditure and some 1,000 revenue titles <strong>in</strong> <strong>the</strong> budget are available with<strong>in</strong> <strong>the</strong> adm<strong>in</strong>istration.<br />
The f<strong>in</strong>ancial plan is a government plan. It is negotiated and revised title by title with<br />
<strong>the</strong> m<strong>in</strong>istries. Then it is summarised <strong>in</strong>to ma<strong>in</strong> categories and submitted to <strong>the</strong> legislative organs<br />
toge<strong>the</strong>r with <strong>the</strong> government’s draft federal budget for <strong>the</strong> next fiscal year. There is no<br />
need for <strong>the</strong> f<strong>in</strong>ancial plan to be adopted by <strong>the</strong> legislature (unlike <strong>the</strong> budget). It is submitted<br />
to parliament for <strong>in</strong>formation only.<br />
4. Extracts from <strong>the</strong> current federal f<strong>in</strong>ancial plan 2007 to 2011 2<br />
The follow<strong>in</strong>g presents examples show<strong>in</strong>g what is conta<strong>in</strong>ed <strong>in</strong> <strong>the</strong> current published f<strong>in</strong>ancial<br />
plan <strong>of</strong> <strong>the</strong> federal government and how this is structured. It is not a summary <strong>of</strong> <strong>the</strong><br />
content <strong>of</strong> <strong>the</strong> current f<strong>in</strong>ancial plan.<br />
The f<strong>in</strong>ancial plan gives an overall picture <strong>of</strong> <strong>the</strong> development <strong>of</strong> public revenue and<br />
expenditure <strong>of</strong> <strong>the</strong> federal government up to 2011:<br />
Figure 1. Trends <strong>in</strong> revenue, expenditure and net borrow<strong>in</strong>g<br />
(actual 2004-2006, budgeted 2007-2011)
<strong>Medium</strong>-<strong>term</strong> <strong>F<strong>in</strong>ancial</strong> <strong>Plann<strong>in</strong>g</strong> <strong>in</strong> <strong>the</strong> <strong>Federal</strong> <strong>Republic</strong> <strong>of</strong> <strong>Germany</strong> 137<br />
Figure 1 shows <strong>the</strong> key federal budget data (revenue, expenditure, net borrow<strong>in</strong>g).<br />
Based on <strong>the</strong> positive expectations depicted <strong>in</strong> <strong>the</strong> f<strong>in</strong>ancial plan with regard to macroeconomic<br />
developments, it is planned to reduce net borrow<strong>in</strong>g to zero by 2011. A marked and<br />
susta<strong>in</strong>ed <strong>in</strong>crease <strong>in</strong> <strong>the</strong> tax base is key to achiev<strong>in</strong>g this reduction.<br />
The f<strong>in</strong>ancial plan reflects <strong>the</strong> policies <strong>of</strong> future years. It depicts federal spend<strong>in</strong>g<br />
from 2006 to 2011 <strong>in</strong> 40 different tasks (Table 1 shows this us<strong>in</strong>g social security as an<br />
example).<br />
Table 1<br />
<strong>Federal</strong> Expenditure 2006 to 2011 by task<br />
Actual<br />
2006<br />
Budget<br />
2007<br />
Draft<br />
2008<br />
- <strong>in</strong> millions <strong>of</strong> euro -<br />
<strong>F<strong>in</strong>ancial</strong> Plan<br />
2009 2010 2011<br />
3.2.1 Social Security<br />
3.2.1.1 Retirement <strong>in</strong>surance payments 77 027 78 332 78 563 79 822 81 047 81 161<br />
3.2.1.2 Labour market 38 871 42 735 42 607 40 646 39 523 38 685<br />
3.2.1.3 Family policy payments 3 421 4 178 5 147 4 695 4 697 4 697<br />
3.2.1.4 Hous<strong>in</strong>g benefits 956 1 000 1 000 1 000 1 000 1 000<br />
3.2.1.5 House-build<strong>in</strong>g premiums 500 436 442 446 608 525<br />
3.2.1.6 Payments to <strong>the</strong> victims <strong>of</strong> war 2 829 2 610 2 368 2 202 2 036 1 870<br />
3.2.1.7 Payments to <strong>the</strong> victims <strong>of</strong> national<br />
socialist persecution, equalisation <strong>of</strong><br />
burdens, payments relat<strong>in</strong>g to <strong>the</strong> consequences<br />
<strong>of</strong> war 599 615 581 555 537 520<br />
3.2.1.8 Agricultural social policy 3 744 3 712 3 737 3 792 3 848 3 892<br />
3.2.1.9 O<strong>the</strong>r social measures 8 290 6 084 6 352 7 889 9 352 10 842<br />
The f<strong>in</strong>ancial plan describes <strong>the</strong> federal government’s planned policy and <strong>the</strong> forecast<br />
f<strong>in</strong>ancial effects over <strong>the</strong> period from 2008 to 2011. An estimate <strong>of</strong> spend<strong>in</strong>g trends and<br />
<strong>the</strong> f<strong>in</strong>ancial implications <strong>of</strong> reform strategies is given <strong>in</strong> each area <strong>of</strong> activity. In order to<br />
be able to forecast <strong>the</strong>se developments, specialist knowledge from <strong>the</strong> various m<strong>in</strong>istries is<br />
<strong>in</strong>cluded, e.g. <strong>the</strong> forecast scale <strong>of</strong> future retirement or <strong>the</strong> work force potential <strong>in</strong> <strong>Germany</strong>.<br />
The revenue side largely describes developments <strong>in</strong> tax revenue. <strong>Federal</strong> revenue for<br />
2008 can be divided <strong>in</strong>to <strong>the</strong> follow<strong>in</strong>g sources:
138 Astrid Lübke<br />
Vat<br />
(net <strong>of</strong> EU own funds<br />
and "German Unity"<br />
fund)<br />
32%<br />
The written part <strong>of</strong> <strong>the</strong> f<strong>in</strong>ancial plan <strong>the</strong>n expla<strong>in</strong>s <strong>the</strong> effects <strong>of</strong> legislative amendments<br />
already enacted and how tax revenue is likely to develop to 2011.<br />
B. Participants and procedures <strong>in</strong> <strong>the</strong> medium-<strong>term</strong> f<strong>in</strong>ancial<br />
plann<strong>in</strong>g <strong>of</strong> <strong>the</strong> German federal government<br />
1. Participants<br />
Wages tax and<br />
assessed<br />
<strong>in</strong>come tax<br />
21.9%<br />
Figure 2. Structure <strong>of</strong> federal revenue 2008<br />
Total revenue: €283.2 bn<br />
Net borrow<strong>in</strong>g<br />
8.2%<br />
O<strong>the</strong>r<br />
11.6%<br />
O<strong>the</strong>r taxes<br />
(net <strong>of</strong> supplemntary<br />
grants and<br />
EU GNI own funds)<br />
Non-asessed taxes <strong>in</strong><br />
<strong>in</strong>come.<br />
corporation tax and<br />
<strong>in</strong>terest <strong>in</strong>come<br />
deduction tax<br />
Energy tax<br />
6.3%<br />
(net <strong>of</strong> Länder share)<br />
11.8%<br />
The federal government’s medium-<strong>term</strong> f<strong>in</strong>ancial plann<strong>in</strong>g is under <strong>the</strong> overall control<br />
<strong>of</strong> <strong>the</strong> Budget Directorate-General <strong>of</strong> <strong>the</strong> <strong>Federal</strong> M<strong>in</strong>istry <strong>of</strong> F<strong>in</strong>ance. All relevant <strong>in</strong>formation<br />
is brought toge<strong>the</strong>r <strong>in</strong> <strong>the</strong> Policy Division for <strong>the</strong> <strong>Federal</strong> Budget. In order to identify undesirable<br />
trends at an early stage and react appropriately, <strong>the</strong> f<strong>in</strong>ancial plann<strong>in</strong>g is cont<strong>in</strong>uously<br />
updated with<strong>in</strong> <strong>the</strong> government. But only once a year — <strong>in</strong> <strong>the</strong> course <strong>of</strong> <strong>the</strong> budget<br />
preparation for <strong>the</strong> next calendar year — is a new f<strong>in</strong>ancial plan drawn up and presented to<br />
<strong>the</strong> legislative organs (Bundestag and Bundesrat).<br />
The relevant divisions <strong>in</strong> <strong>the</strong> Budget Directorate-General are responsible for <strong>in</strong>dividual<br />
departmental sections <strong>of</strong> <strong>the</strong> budget. Early <strong>in</strong> <strong>the</strong> year, <strong>the</strong>y start re-evaluat<strong>in</strong>g <strong>the</strong> <strong>in</strong>dividual<br />
budget titles and estimat<strong>in</strong>g <strong>the</strong> risks connected with <strong>the</strong>m. Later <strong>in</strong> <strong>the</strong> budget preparation<br />
procedure, <strong>the</strong>y will have to negotiate <strong>the</strong>ir estimates at work<strong>in</strong>g level with <strong>the</strong> departments<br />
for which <strong>the</strong>y are responsible.
<strong>Medium</strong>-<strong>term</strong> <strong>F<strong>in</strong>ancial</strong> <strong>Plann<strong>in</strong>g</strong> <strong>in</strong> <strong>the</strong> <strong>Federal</strong> <strong>Republic</strong> <strong>of</strong> <strong>Germany</strong> 139<br />
Work<strong>in</strong>g Party on Tax Estimates<br />
Estimates <strong>of</strong> future revenue are based on <strong>the</strong> estimates (spr<strong>in</strong>g / autumn) drawn up by<br />
<strong>the</strong> «Work<strong>in</strong>g Party on Tax Estimates», meet<strong>in</strong>g each year <strong>in</strong> May. This body <strong>in</strong>cludes representatives<br />
<strong>of</strong> all <strong>the</strong> f<strong>in</strong>ancial and economic experts <strong>in</strong> <strong>Germany</strong>:<br />
� <strong>Federal</strong> M<strong>in</strong>istry <strong>of</strong> F<strong>in</strong>ance<br />
� <strong>Federal</strong> M<strong>in</strong>istry <strong>of</strong> Economics and Technology<br />
� F<strong>in</strong>ance M<strong>in</strong>istries <strong>of</strong> <strong>the</strong> Länder<br />
� Five lead<strong>in</strong>g economic research <strong>in</strong>stitutes<br />
� <strong>Federal</strong> Statistical Office<br />
� German Bundesbank<br />
� Board <strong>of</strong> Experts for <strong>the</strong> Assessment <strong>of</strong> General Economic Trends<br />
� <strong>Federal</strong> Union <strong>of</strong> Central Associations <strong>of</strong> Local Authorities<br />
<strong>F<strong>in</strong>ancial</strong> <strong>Plann<strong>in</strong>g</strong> Council<br />
The necessary coord<strong>in</strong>ation <strong>of</strong> <strong>the</strong> budgets and f<strong>in</strong>ancial plans <strong>of</strong> <strong>the</strong> different levels<br />
<strong>of</strong> government is undertaken <strong>in</strong> <strong>the</strong> <strong>F<strong>in</strong>ancial</strong> <strong>Plann<strong>in</strong>g</strong> Council. This is a coord<strong>in</strong>at<strong>in</strong>g<br />
body at m<strong>in</strong>isterial level, led by <strong>the</strong> BMF and compris<strong>in</strong>g, <strong>in</strong> particular, <strong>the</strong> f<strong>in</strong>ance m<strong>in</strong>isters<br />
<strong>of</strong> <strong>the</strong> Länder and representatives <strong>of</strong> <strong>the</strong> associations <strong>of</strong> municipalities. Representatives<br />
<strong>of</strong> <strong>the</strong> Bundesbank may participate <strong>in</strong> <strong>the</strong>se consultations. The <strong>F<strong>in</strong>ancial</strong> <strong>Plann<strong>in</strong>g</strong><br />
Council meets twice a year (spr<strong>in</strong>g/autumn). These meet<strong>in</strong>gs strive to reach agreement<br />
on future spend<strong>in</strong>g policy, which can also f<strong>in</strong>d expression <strong>in</strong> agreements on expenditure<br />
ceil<strong>in</strong>gs.<br />
2. Procedure<br />
At <strong>the</strong> start <strong>of</strong> <strong>the</strong> calendar year, which is also <strong>the</strong> start <strong>of</strong> <strong>the</strong> budget preparation year,<br />
<strong>the</strong> f<strong>in</strong>ancial plan is updated based on <strong>the</strong> actual figures <strong>of</strong> <strong>the</strong> fiscal year which has just<br />
ended. As <strong>the</strong> new budget is prepared, <strong>the</strong> <strong>in</strong>dividual revenue and expenditure titles must be<br />
re-evaluated. At <strong>the</strong> same time, due account is given dur<strong>in</strong>g this process to <strong>the</strong> risks and to<br />
any changes <strong>in</strong> <strong>the</strong> law. In this way it is <strong>the</strong>n possible to roll <strong>the</strong> <strong>in</strong>dividual titles forward for<br />
ano<strong>the</strong>r three years and to evaluate <strong>the</strong>m on this basis.<br />
Once a first compilation has been made, <strong>the</strong> f<strong>in</strong>ancial plan is first analysed <strong>in</strong>ternally by<br />
<strong>the</strong> <strong>Federal</strong> M<strong>in</strong>istry <strong>of</strong> F<strong>in</strong>ance <strong>in</strong> order to identify any need for action <strong>in</strong> areas <strong>in</strong> which particularly<br />
strong <strong>in</strong>creases or undesirably high expenditure are expected. This <strong>in</strong>formation<br />
may provide impetus for <strong>the</strong> policy guidel<strong>in</strong>es <strong>of</strong> <strong>the</strong> federal government.<br />
At issue <strong>in</strong> <strong>the</strong> budget negotiations between <strong>the</strong> <strong>Federal</strong> M<strong>in</strong>istry <strong>of</strong> F<strong>in</strong>ance and <strong>the</strong> departments<br />
are <strong>the</strong> budget estimates for <strong>the</strong> com<strong>in</strong>g fiscal year and, simultaneously, <strong>the</strong> f<strong>in</strong>ancial<br />
plan. Thus, <strong>the</strong> planned figures for next fiscal years are debated with<strong>in</strong> <strong>the</strong> government
140 Astrid Lübke<br />
between <strong>the</strong> <strong>Federal</strong> M<strong>in</strong>istry <strong>of</strong> F<strong>in</strong>ance and <strong>the</strong> o<strong>the</strong>r federal m<strong>in</strong>istries. The outcome <strong>of</strong><br />
this process <strong>of</strong> consultation results <strong>in</strong> a fur<strong>the</strong>r adjustment <strong>of</strong> <strong>the</strong> f<strong>in</strong>ancial plan.<br />
It is essential for expenditure and revenue to be brought <strong>in</strong>to l<strong>in</strong>e with <strong>the</strong> aggregate<br />
productive capacity <strong>of</strong> <strong>the</strong> national economy. To this end, plann<strong>in</strong>g must be based on a medium-<strong>term</strong><br />
projection <strong>of</strong> key macroeconomic data, which can enable a forecast to be made <strong>of</strong><br />
tax revenue and expenditure for <strong>the</strong> labour market, <strong>in</strong> particular.<br />
In <strong>the</strong> German system <strong>of</strong> f<strong>in</strong>ancial plann<strong>in</strong>g, a forecast <strong>of</strong> aggregate economic development<br />
is made for <strong>the</strong> first two years <strong>of</strong> <strong>the</strong> plann<strong>in</strong>g period, tak<strong>in</strong>g account <strong>of</strong> discernible<br />
trends <strong>in</strong> economic activity. The medium-<strong>term</strong> projection <strong>of</strong> <strong>the</strong> envisaged development <strong>of</strong><br />
<strong>the</strong> economy <strong>in</strong> <strong>the</strong> last three years <strong>of</strong> <strong>the</strong> plann<strong>in</strong>g period deliberately makes no allowance<br />
for fluctuations <strong>in</strong> <strong>the</strong> level <strong>of</strong> economic activity.<br />
Based on this macroeconomic projection, <strong>the</strong> Work<strong>in</strong>g Party on Tax Estimates produces<br />
a forecast <strong>of</strong> tax revenues <strong>in</strong> <strong>the</strong> f<strong>in</strong>ancial plann<strong>in</strong>g period.<br />
3. The dovetail<strong>in</strong>g <strong>of</strong> central and regional medium-<strong>term</strong><br />
f<strong>in</strong>ancial plann<strong>in</strong>g<br />
All Länder and municipalities <strong>in</strong> <strong>the</strong> <strong>Federal</strong> <strong>Republic</strong> <strong>of</strong> <strong>Germany</strong> are obliged to draw<br />
up a f<strong>in</strong>ancial plan.<br />
In a country consist<strong>in</strong>g <strong>of</strong> a federation <strong>of</strong> states, <strong>the</strong> fiscal policies pursued by <strong>the</strong> different<br />
levels <strong>of</strong> government must be co-ord<strong>in</strong>ated <strong>in</strong> <strong>the</strong> <strong>in</strong>terest <strong>of</strong> achiev<strong>in</strong>g <strong>the</strong> desired development<br />
<strong>of</strong> <strong>the</strong> economy as a whole. To this end, <strong>the</strong> f<strong>in</strong>ancial plann<strong>in</strong>g data <strong>of</strong> all levels must<br />
be comb<strong>in</strong>ed <strong>in</strong> an aggregate public-sector budget. This means that <strong>the</strong> budgets and f<strong>in</strong>ancial<br />
plans <strong>of</strong> public authorities must be comparable and must, <strong>in</strong> particular, employ a standardised<br />
system <strong>of</strong> budget classification.<br />
As a member <strong>of</strong> European Monetary Union, <strong>the</strong> <strong>Federal</strong> <strong>Republic</strong> <strong>of</strong> <strong>Germany</strong> must fulfil<br />
certa<strong>in</strong> criteria concern<strong>in</strong>g <strong>the</strong> general government deficit (no more than 3% <strong>of</strong> gross domestic<br />
product) and <strong>the</strong> total amount <strong>of</strong> public-sector <strong>in</strong>debtedness (no more than 60% <strong>of</strong><br />
gross domestic product).<br />
S<strong>in</strong>ce <strong>in</strong> <strong>Germany</strong> <strong>the</strong> Länder and <strong>the</strong> federal government are autonomous and <strong>in</strong>dependent<br />
<strong>of</strong> each o<strong>the</strong>r <strong>in</strong> <strong>the</strong>ir fiscal adm<strong>in</strong>istration (Article 109 GG), <strong>the</strong>y need to reach mutual<br />
agreement on <strong>the</strong>ir spend<strong>in</strong>g policies if <strong>the</strong> «Maastricht criteria» are to be fulfilled. For<br />
this reason, section 51a was <strong>in</strong>troduced <strong>in</strong>to <strong>the</strong> Budgetary Procedures Act, lay<strong>in</strong>g <strong>the</strong> foundations<br />
for a so-called «national stability pact».<br />
This development has lent <strong>in</strong>creased importance to <strong>the</strong> <strong>F<strong>in</strong>ancial</strong> <strong>Plann<strong>in</strong>g</strong> Council, as<br />
this has become <strong>the</strong> body <strong>in</strong> which <strong>the</strong> budgetary developments <strong>of</strong> <strong>the</strong> federal government<br />
and <strong>of</strong> <strong>the</strong> Länder are discussed and <strong>in</strong> which recommendations for <strong>the</strong> observance <strong>of</strong> fiscal<br />
discipl<strong>in</strong>e are drawn up. Spend<strong>in</strong>g policies are discussed twice a year <strong>in</strong> <strong>the</strong> meet<strong>in</strong>gs <strong>of</strong> <strong>the</strong><br />
<strong>F<strong>in</strong>ancial</strong> <strong>Plann<strong>in</strong>g</strong> Council, and — if possible — agreement is reached.
<strong>Medium</strong>-<strong>term</strong> <strong>F<strong>in</strong>ancial</strong> <strong>Plann<strong>in</strong>g</strong> <strong>in</strong> <strong>the</strong> <strong>Federal</strong> <strong>Republic</strong> <strong>of</strong> <strong>Germany</strong> 141<br />
The comparability <strong>of</strong> <strong>the</strong> data is based on <strong>the</strong> arrangement <strong>of</strong> <strong>the</strong> budget system, a standard<br />
which is equally b<strong>in</strong>d<strong>in</strong>g for <strong>the</strong> federal government and <strong>the</strong> Länder; it formed part <strong>of</strong><br />
<strong>the</strong> 1969 budget reform and is laid out <strong>in</strong> <strong>the</strong> Budget Pr<strong>in</strong>ciples Act.<br />
C. <strong>Medium</strong>-<strong>term</strong> f<strong>in</strong>ancial plann<strong>in</strong>g <strong>in</strong> <strong>the</strong> budget preparation<br />
procedure<br />
In view <strong>of</strong> <strong>the</strong> close l<strong>in</strong>ks between <strong>the</strong> budget and <strong>the</strong> f<strong>in</strong>ancial plan, it makes sense for<br />
<strong>the</strong> latter to be drawn up at <strong>the</strong> same time as <strong>the</strong> yearly budget. The f<strong>in</strong>ancial plan <strong>the</strong>n serves<br />
a year later as a start<strong>in</strong>g and reference po<strong>in</strong>t for prepar<strong>in</strong>g <strong>the</strong> new draft budget and <strong>the</strong> new<br />
f<strong>in</strong>ancial plan.<br />
1. Introduction<br />
The <strong>Federal</strong> M<strong>in</strong>istry <strong>of</strong> F<strong>in</strong>ance is responsible for <strong>the</strong> budget preparation procedure.<br />
The procedure beg<strong>in</strong>s one year before passage <strong>of</strong> <strong>the</strong> budget law with a circular to all government<br />
departments to submit <strong>the</strong>ir bids/estimates to <strong>the</strong> FMF.<br />
In accordance with <strong>the</strong> arrangement <strong>of</strong> <strong>the</strong> budget system, as set forth <strong>in</strong> <strong>the</strong> <strong>Federal</strong><br />
Budget Code, <strong>the</strong> budget is subdivided <strong>in</strong>to departmental budgets, chapters and titles.<br />
The departmental budgets conta<strong>in</strong> <strong>the</strong> funds appropriated for <strong>the</strong> m<strong>in</strong>istries. They<br />
are subdivided <strong>in</strong>to chapters for <strong>the</strong> m<strong>in</strong>istry, general appropriations, subord<strong>in</strong>ate authorities<br />
etc. Each chapter is subdivided <strong>in</strong>to titles, which are <strong>the</strong> smallest subdivisions <strong>in</strong> <strong>the</strong><br />
budget.<br />
Currently, <strong>the</strong>se comprise about 1,000 revenue titles and about 5,000 expenditure titles,<br />
grouped <strong>in</strong> chapters and departmental budgets. These titles are subject to checks <strong>in</strong> medium-<strong>term</strong><br />
plann<strong>in</strong>g and <strong>in</strong> <strong>the</strong> budget preparation procedure. After <strong>the</strong> close <strong>of</strong> <strong>the</strong> fiscal<br />
year, <strong>the</strong>y are audited by <strong>the</strong> <strong>Federal</strong> Court <strong>of</strong> Audit to see whe<strong>the</strong>r <strong>the</strong>y were managed effectively.<br />
2. Schedule<br />
The budget preparation procedure may be seen from <strong>the</strong> follow<strong>in</strong>g diagram:
142 Astrid Lübke<br />
2006<br />
December<br />
2007<br />
January<br />
February<br />
March<br />
April<br />
May<br />
June<br />
July<br />
August<br />
September<br />
October<br />
November<br />
December<br />
2008<br />
2009<br />
Preparation <strong>of</strong> <strong>the</strong> budget 2008<br />
Circular to <strong>the</strong> departments for <strong>the</strong> preparation <strong>of</strong> <strong>the</strong><br />
budget (2008) and <strong>the</strong> f<strong>in</strong>ancial plan (2007-2011)<br />
Preparation <strong>of</strong> <strong>the</strong> estimates <strong>of</strong> <strong>the</strong> budget and <strong>the</strong> f<strong>in</strong>ancial plan<br />
Re-evaluation and plann<strong>in</strong>g <strong>of</strong> <strong>the</strong> budget titles<br />
Fix<strong>in</strong>g <strong>of</strong> macroeconomic benchmark data<br />
Departmental bids sent to FMF;<br />
Start <strong>of</strong> negotiations FMF/departments at technical level<br />
for <strong>the</strong> draft budget (2008) and <strong>the</strong> f<strong>in</strong>ancial plan (2007-2011)<br />
<strong>Medium</strong>-<strong>term</strong> projection <strong>of</strong> economic development and<br />
medium-<strong>term</strong> tax revenue estimate;<br />
<strong>F<strong>in</strong>ancial</strong> <strong>Plann<strong>in</strong>g</strong> Council<br />
Start <strong>of</strong> budget negotiations at m<strong>in</strong>isterial level<br />
Cab<strong>in</strong>et resolution on draft budget and f<strong>in</strong>ancial plan<br />
Draft budget sent to Bundestag (BT) and Bundesrat (BR)<br />
for deliberation and f<strong>in</strong>ancial plan for <strong>in</strong>formation<br />
1st read<strong>in</strong>g <strong>in</strong> <strong>the</strong> BT<br />
1st read<strong>in</strong>g <strong>in</strong> <strong>the</strong> BR<br />
Start <strong>of</strong> discussions <strong>in</strong> BT committees<br />
Short-<strong>term</strong> projection <strong>of</strong> economic development and<br />
short-<strong>term</strong> tax revenue estimate;<br />
F<strong>in</strong>al discussion <strong>in</strong> BT budget committee;<br />
<strong>F<strong>in</strong>ancial</strong> <strong>Plann<strong>in</strong>g</strong> Council<br />
2nd and 3rd read<strong>in</strong>g <strong>in</strong> <strong>the</strong> BT<br />
2nd debate <strong>in</strong> <strong>the</strong> BR<br />
Promulgation <strong>of</strong> <strong>the</strong> budget statute<br />
Start <strong>of</strong> budget execution<br />
Render<strong>in</strong>g <strong>of</strong> accounts
<strong>Medium</strong>-<strong>term</strong> <strong>F<strong>in</strong>ancial</strong> <strong>Plann<strong>in</strong>g</strong> <strong>in</strong> <strong>the</strong> <strong>Federal</strong> <strong>Republic</strong> <strong>of</strong> <strong>Germany</strong> 143<br />
3. Issue and negotiation <strong>of</strong> <strong>the</strong> medium-<strong>term</strong> f<strong>in</strong>ancial plan<br />
After <strong>the</strong> circular on <strong>the</strong> preparation <strong>of</strong> <strong>the</strong> budget has seen sent to <strong>the</strong> departments, <strong>the</strong><br />
preparations for <strong>the</strong> medium-<strong>term</strong> f<strong>in</strong>ancial plann<strong>in</strong>g beg<strong>in</strong> <strong>in</strong> <strong>the</strong> FMF. This <strong>in</strong>cludes tak<strong>in</strong>g<br />
stock <strong>of</strong> <strong>the</strong> f<strong>in</strong>ished titles <strong>of</strong> <strong>the</strong> fiscal year which has just come to an end and forecast<strong>in</strong>g future<br />
expenditure based on <strong>the</strong> <strong>in</strong>dividual titles. The tax estimate <strong>of</strong> <strong>the</strong> previous autumn and<br />
<strong>the</strong> discussions <strong>of</strong> <strong>the</strong> <strong>F<strong>in</strong>ancial</strong> <strong>Plann<strong>in</strong>g</strong> Council form <strong>the</strong> first foundation for <strong>the</strong> macroeconomic<br />
benchmark data.<br />
The bids/estimate <strong>of</strong> government departments are submitted to <strong>the</strong> FMF <strong>in</strong> <strong>the</strong> spr<strong>in</strong>g<br />
and are checked on <strong>the</strong> grounds <strong>of</strong> need, conformity with regulations and economy.<br />
These pr<strong>in</strong>ciples also provide a benchmark for <strong>the</strong> negotiations on <strong>the</strong> draft budget and<br />
<strong>the</strong> f<strong>in</strong>ancial plan which follow at work<strong>in</strong>g level with <strong>the</strong> various departments. First,<br />
<strong>in</strong>tra-governmental negotiations between <strong>the</strong> <strong>Federal</strong> M<strong>in</strong>istry <strong>of</strong> F<strong>in</strong>ance and <strong>the</strong> various<br />
m<strong>in</strong>istries are conducted. Attempts are made at <strong>the</strong> level <strong>of</strong> head <strong>of</strong> division to reach suitable<br />
title appropriations for <strong>in</strong>dividual areas <strong>of</strong> expenditure. A large number <strong>of</strong> spend<strong>in</strong>g appropriations<br />
can be agreed at this level. Only those areas where no agreement has as yet been<br />
reached are discussed aga<strong>in</strong>.<br />
Any spend<strong>in</strong>g appropriations that cannot be settled at this level are <strong>the</strong> subject <strong>of</strong> fur<strong>the</strong>r<br />
negotiations at directorate, state secretary or m<strong>in</strong>isterial level. This process is aimed not<br />
only at br<strong>in</strong>g<strong>in</strong>g toge<strong>the</strong>r <strong>the</strong> positions <strong>of</strong> <strong>the</strong> FMF and <strong>of</strong> <strong>the</strong> departments, <strong>the</strong> macroeconomic<br />
benchmark data must also be reconciled with <strong>the</strong> detailed, title by title plann<strong>in</strong>g <strong>in</strong> <strong>the</strong><br />
draft budget and with <strong>the</strong> f<strong>in</strong>ancial plan. This is an iterative process <strong>in</strong> which each and every<br />
<strong>in</strong>dividual title is negotiated between <strong>the</strong> FMF and <strong>the</strong> department concerned and rolled forward<br />
for <strong>the</strong> f<strong>in</strong>ancial plann<strong>in</strong>g period, so that with<strong>in</strong> <strong>the</strong> adm<strong>in</strong>istration medium-<strong>term</strong> plann<strong>in</strong>g<br />
data is available for all <strong>the</strong> expenditure and revenue titles. The law — <strong>the</strong> <strong>Federal</strong> Budget<br />
Code — requires that a realistic estimate be made for every budget title, so <strong>the</strong> key data<br />
<strong>of</strong> <strong>the</strong> start<strong>in</strong>g position may have to be corrected. In this process, more recent data is provided<br />
by <strong>the</strong> macroeconomic projection <strong>in</strong> April and <strong>the</strong> latest tax estimate <strong>in</strong> May.<br />
After hav<strong>in</strong>g been adopted by <strong>the</strong> cab<strong>in</strong>et <strong>of</strong> <strong>the</strong> federal government (June), <strong>the</strong> draft<br />
budget is submitted to <strong>the</strong> Bundestag and <strong>the</strong> Bundesrat for consultation. In addition to <strong>the</strong><br />
draft budget, <strong>the</strong> federal government’s f<strong>in</strong>ancial plan (scope and nature <strong>of</strong> expected revenue<br />
and expenditure over a five-year period) is also presented. However, <strong>the</strong> Bundestag and <strong>the</strong><br />
Bundesrat receive <strong>the</strong> f<strong>in</strong>ancial plan for <strong>in</strong>formation only.<br />
At this po<strong>in</strong>t <strong>in</strong> <strong>the</strong> budget preparation procedure, <strong>the</strong> medium-<strong>term</strong> f<strong>in</strong>ancial plann<strong>in</strong>g<br />
has been completed. The parliamentary procedure and consultations <strong>in</strong> <strong>the</strong> Bundesrat now<br />
only deal with <strong>the</strong> draft budget for <strong>the</strong> com<strong>in</strong>g fiscal year, <strong>in</strong> this case for 2008.<br />
Notes<br />
1. See section 1 <strong>of</strong> <strong>the</strong> 1967 Act to promote economic stability and growth (Gesetz zur Förderung der Stabilität<br />
und des Wachstums der Wirtschaft, or StWG) for a def<strong>in</strong>ition <strong>of</strong> macroeconomic equilibrium.<br />
2. The current version can be found on <strong>the</strong> M<strong>in</strong>istry website at: http://www.bundesf<strong>in</strong>anzm<strong>in</strong>isterium.de/<br />
nn_4514/DE/BMF__Startseite/Service/Broschueren_Bestellservice/B
144 Astrid Lübke<br />
Abbreviations<br />
BHO <strong>Federal</strong> Budget Code<br />
BR Bundesrat, Chamber <strong>of</strong> <strong>the</strong> Länder, Upper House <strong>of</strong> <strong>the</strong> German Parliament<br />
BT Bundestag, Lower House <strong>of</strong> <strong>the</strong> German Parliament<br />
FCA <strong>Federal</strong> Court <strong>of</strong> Audit<br />
FMF <strong>Federal</strong> M<strong>in</strong>istry <strong>of</strong> F<strong>in</strong>ance<br />
GG Basic Law (Constitution) <strong>of</strong> <strong>the</strong> <strong>Federal</strong> <strong>Republic</strong> <strong>of</strong> <strong>Germany</strong><br />
HGrG Law on Budgetary Pr<strong>in</strong>ciples<br />
LHO Landeshaushaltsordnung, Regional Budget Code<br />
StWG Law to Promote Economic Stability and Growth