Nachhaltige Finanz‐ und Investitionspolitik der Bundesländer*

TLDR: In this paper, it is argued that the commitment of subnational governments to sustainable public finances could be strengthened by invigorating state-level tax and expenditure autonomy and that the constitutional "golden rule" stipulating that borrowing should not exceed investment expenditures does not ensure the solvency of the states.

Abstract: : In Germany the sustainability of fiscal policy is determined to a substantial part by the federal states (Bundeslaender). Their portion of the public debt amounts to nearly 40 percent. Econometric tests show that the fiscal policy of the federal states taken collectively is not sustainable. The requirement for fiscal sustainability is fulfilled only by two western Laender, Hesse and North-Rhine Westphalia, and one eastern Land (Saxony). Furthermore, it is shown that the constitutional “golden rule” stipulating that borrowing should not exceed investment expenditures does not ensure the solvency of the states. This holds for theoretical reasons but also because there is a lack of clarity and enforceability. Finally, it is argued that the commitment of subnational governments to sustainable public finances could be strengthened by invigorating state-level tax and expenditure autonomy.