What determines how federal budgets are spent

taxes and finances

Constanze Hacke

Constanze Hacke works in Cologne as a business journalist, lecturer and presenter for radio, print media, specialist publishers, public clients and companies. For more than a decade it has been under the motto "Economy - made easy!" successfully self-employed and has made a name for herself as an expert, especially in the field of taxation. Her work also focuses on the areas of law, finance, economic policy, medium-sized businesses and management. As a specialist journalist, she sees her task as being to understand and explain complex relationships and dry topics, and to make them understandable and vivid. At the end of 2011 her book "Self-employed and then? How freelancers become successful in the long term" was published by Wiley-VCH Verlag. In spring 2013 the guide "Taxes made easy. First aid for the self-employed" will be published by the same publisher.
Contact: www.c-hacke.de

Budget law is considered the royal right of parliament. This is where it is decided why, what and when the government may spend taxpayers' money. But federal, state and local government debt continues to rise, not least due to the sovereign debt crisis in the euro area.

The budget committee of the Bundestag met on September 2nd, 2013 in Berlin for a special session to debate a possible third rescue package for Greece (& copy picture-alliance / dpa)


All income and expenditure of the state must be drawn up in a budget for each year. This applies to every federal level - for the federal government, the individual states as well as for cities and municipalities. All tax revenues are shown in the public budgets. At the same time, it must be clear from the respective budget what this income is needed for and what it is being spent on. The budget is thus also a control instrument for the parliaments, which have to pass it with a budget law. The ministries are then bound by this budget law.

Ideally, the state should permanently base its expenditure on the income it can expect. In this way, as little debt as possible should be incurred and as few new loans as possible should be taken out. However, it is often not possible without debts, because on the one hand the state has to perform certain tasks continuously. On the other hand, every government has a certain idea of ​​how it wants to shape politics. Financial policy can, for example, pursue these goals:
  • promote social justice through redistribution;
  • to stimulate the economy;
  • to revive economic growth.
In order to sustainably rehabilitate public budgets, new debt can only be borrowed to a limited extent in the future: According to Article 115 of the Basic Law, the federal government may only have a structural debt of 0.35 percent of gross domestic product. Exceptions are only permitted in emergencies and natural disasters - or when the economic development “deviates from the normal situation”. Loans that are taken out to stimulate the upswing must be repaid “in line with the economic cycle”. The aim of this debt brake is to remove the accumulated debt bit by bit.

The way of the federal budget

This is how the federal budget is created
All tax revenues flow into the budget - depending on who owes the tax, to the federal, state or municipal budget (see p. 6 f.). Those responsible have to come a long way before a state budget is decided and passed. The federal budget is perceived by the public mainly in autumn. Because then the budget debate in the Bundestag is often used for a political exchange of blows between the government and the opposition. Basically, however, ministries, committees and parliamentarians deal with the budget almost all year round. If one is passed, the Federal Ministry of Finance starts planning the budget for the following year.

All information that is necessary for the draft budget and the medium-term financial plan is brought together in the Federal Ministry of Finance. Work on the budget begins here with the establishment of key figures, which are approved by the Federal Cabinet in March of each year. Based on the benchmarks, so-called limit amounts are set for each ministry. The aim is to limit the expenditure of the individual ministries from the outset and to specify the financial framework for the next four years. In the past, the ministries could submit their expenditure requests - the so-called estimates - to the Federal Ministry of Finance. The ministry then negotiated these estimates with the specialist departments in order to find a compromise. Since the principle of consolidation should also be reflected in the budget process, the whole process was “turned on its head”: The starting point for budget negotiations is no longer the spending requests of the relevant ministries, but the proposals of the Federal Ministry of Finance. On this basis, the entire cabinet then decides on the binding income and expenditure budgets - the benchmarks.

Representatives of the Federal Audit Office initially take part in budget negotiations as advisors; later - when political decisions are made - the Federal Audit Office is no longer present, which is intended to preserve the non-governmental position of the supervisory body.

In May there will be hard numbers for the first time when the “Tax Estimates” working group presents its spring forecast. Because in order to be able to plan the budget realistically, all those involved need to know about the income that is likely to be available. Therefore, representatives meet twice a year in the “Tax Estimates” working group
  • the federal and state finance ministries,
  • of the leading economic research institutes,
  • of the Federal Statistical Office,
  • of the Expert Council for the assessment of macroeconomic development (i.e. the "Five Wise Men"),
  • the Deutsche Bundesbank and
  • the federal association of municipal umbrella organizations,
to estimate tax revenues and to assess macroeconomic development.

In May, the focus is on the medium-term assessment of tax revenue; here it is about the period of the current and the four following years. In November - just as the federal budget is being adopted - short-term projections for the budget planning for the coming year will be made. This autumn forecast is then also the basis for the budget law approaches.

The Stability Council meets in early summer. This body replaced the former Financial Planning Council, which was abolished by Federalism Reform II (see p. 9). Since then, the Stability Council has had the task of advising the federal levels on drawing up budget and financial plans and of keeping an eye on the general economic and financial framework. Because the income and expenditure of the various levels of government should of course be coordinated. The Stability Council also ensures that Germany can meet its obligations to the European Union in connection with the Stability and Growth Pact.

Since, on the one hand, each department claims certain income for itself and is hardly prepared to cut back, but on the other hand only limited income is available, negotiations must be carried out: first at the department head level, then at the department head level and finally between the Federal Minister of Finance and his colleagues at ministerial level. If the parties involved cannot agree, the federal government decides. In the summer, the cabinet adopts the entire draft budget and the financial plan; In August, the several thousand-page work will be sent to the Bundestag and Bundesrat. The draft budget is divided into an overall plan and individual plans:
  • All individual plans are summarized in the overall plan; These individual plans are presented in the budget overview in the budget overview. The financing balance is calculated in the financing overview and the income from loans and the repayment expenses are compared in the loan financing plan.
  • The individual plans are introduced with an overview of groupings, functions, personnel and transitory items. The individual plans list exactly what is to be received in the respective department and what it is to be spent on. In addition, the commitment appropriations, i.e. anticipations for later budget years, are budgeted here. In principle, the ministerial principle applies, each department is assigned a separate plan.
The preparation of the federal budget
In autumn the Federal Council and the Bundestag have the floor: Parliament deliberates on the budget and its individual plans in the first reading. This debate will be used for a general discussion on the broad lines of government policy. The advice on the budget of the Chancellery occupies a special position. In terms of numbers, this section is not particularly significant. Since he is representative of the entire government policy in the debate, there is a regular exchange of blows between the government and the opposition during the debate on this budget. Once the several days of deliberations are over, the draft budget is referred to the budget committee of the Bundestag. This is where the real work begins: the committee examines all approaches that amount to several thousand income and expenditure items and makes suggestions for changes where it deems it necessary.

The short-term estimates and forecasts from the autumn meeting of the “Tax Estimates” working group will then be incorporated into the final deliberations of the Budget Committee in November. In the second reading in the Bundestag, the results of the budget committee are presented - and the amended draft is discussed. Each section is now decided upon, and the draft budget as a whole is voted on in the third reading. After this vote, the Federal Council has another say, which - if it does not agree with the draft - can appeal to the mediation committee. If the latter changes something in the draft, the Bundestag must decide whether to accept these changes. Finally, the budget law is adopted and the final budget is officially announced at the end of December - usually in the Federal Law Gazette. At this point in time, the employees in the Federal Ministry of Finance are already busy preparing the circular for the next budget.

The federal budget
This long road shows that a budget is and remains a forecast for a certain period of time. It only sets goals for income and expenditure. Because a public budget has this prognostic character, budget gaps occur again and again - for example due to unforeseen expenses that cannot be offset by savings, or due to lower tax revenues. In such cases, a supplementary budget must be introduced that changes the planning that has already been decided and laid down. Such a supplementary budget must be like the right budget
  • drawn up by the Federal Minister of Finance,
  • adopted by the cabinet,
  • advised by the budget committee,
  • decided by parliament and,
  • as far as it concerns the federal budget, be adopted by the Federal Council.
Often this is also about additional new debt.

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Working Group “Tax Estimates”: Crystal Ball or Principle of Hope?

“Appreciate”: If you used this word a few hundred years ago, you didn't necessarily mean to just estimate a value. In Middle High German, the “estimate” was synonymous with the tax; who guessed, taxed. This is no longer the case today, but the “Tax Estimates” working group, which meets twice a year, prepares the basis for budget planning by the federal, state and local governments with its tax forecasts.

Every May and November - and thus at the start and end of the current budget planning - the appraisers sit down at a table: representatives of the federal and state finance ministries, the leading economic research institutes, the Federal Statistical Office, the Advisory Council, the Bundesbank and the Federal Association of Local Authorities. Before making an estimate, the panel of experts discusses the income from all types of taxes and customs duties. For this purpose, complicated calculation models are set up that are based on data such as economic growth, income increases, inflation or the development of employment. Income tax, wage tax, sales tax and the major consumption taxes, such as the energy tax, are discussed particularly long and intensively. After all, this is where the highest revenues can be expected. After three days, the debate will end and the figures will have to be made public. The federal government adopts the figures from the 1: 1 estimate in its draft budget.

All forecasts are only as good as the assumptions made beforehand. And so, like a weather forecast, the quality of the estimator forecast decreases towards the end of the forecast period. Some time ago, the Federal Audit Office took a close look at tax estimates as a budget planning instrument - and found that the appraisers were mostly wrong, especially in their medium-term forecasts. According to the Federal Audit Office, the Federal Ministry of Economics, from which the medium-term economic forecast originates, tends to show developments in gross domestic product positively, also for psychological reasons. Since the economic forecast is more or less the only basis for the medium-term forecast of the tax estimators, this has a direct impact on the large tax revenues - such as income tax or sales tax - because these are directly related to economic development.

Another point of criticism: the working group estimates tax revenue on the basis of applicable law. Tax changes are usually not taken into account in the forecast. And if they do, the financial implications of such changes are usually over-optimistic. However, it is difficult to predict the behavior of companies and citizens after tax changes. The Federal Court of Auditors therefore urge the working group to be a little more careful.

Nevertheless, the following applies: Without a tax estimate, no budget and financial planning is possible. Therefore, the results of the tax estimate in May, as a medium-term forecast, always form the numerical basis for the budget of the following year.



Source text

Tasks of the Budget Committee

As often as the media reports what the government is planning, pledging, funding or subsidizing, that is only half the story. Because not a cent flows that Parliament has not approved beforehand. Parliament has fought hard for the much-cited “king's right”. The budget committee controls point by point where the taxpayer's money should go.

During the financial and economic crisis, the level of new borrowing skyrocketed to previously undreamt-of dimensions because the state tried to cushion the consequences of the crisis. It is all the more important for the Budget Committee to stick to the goal of reducing debt step by step with the debt brake.

At the same time, it is the declared aim to give even greater weight to education. Additional risks arise from the unpredictable development of interest rates. In addition, the budget is massively influenced by economic development and the employment situation: 100,000 unemployed more or less are not only 100,000 destinies, but also billions of euros more or less in the federal budget. For the committee, the question arises whether a health reform can be financed more heavily and whether tax breaks are easily possible or whether they ultimately lead to new debts.

These are the general conditions of work. Much more effort goes into going through the entire draft budget, which never goes without noticeable corrections. In addition, the housekeepers easily spend 70, 80 or more hours together after the rapporteurs have already worked intensively through each individual plan and “only” forwarded the controversial projects to the entire committee for “adjustment”. This procedure is due twice every year at the beginning of the electoral term - and yet it is only the beginning of the constant control of the outflow of funds during the year.

Gregor Mayntz, “Budget Committee. Control point by point ”, in: Focus on the Bundestag Special: The Committees of the German Bundestag, No. 1/2010. Online at: http://www.bundestag.de/blickpunkt/104_Spezial/1001/1001008.htm (as of July 2012)