Volume 5, Issue 12, 28 November 2008

Prior to a recovery in 2007 and 2008, Germany's public finances had deteriorated substantially since reunification. The lack of efficient expenditure and budget rules was a crucial factor in this development. To limit future debt, proposals for a new budget rule are currently being discussed in the context of the second stage of the Reform of Federal Fiscal Relations (Föderalismusreform II). The various proposals put forward by the government authorities, major parties and political and economic institutions show a tendency to favour a close-to-balance rule which would be compatible with the European Stability and Growth Pact and would constitute a major improvement on the current rule. Conceptual differences at the Länder and Bund-Länder level appear to be reconcilable. However, they need to be resolved rapidly to capitalise on the current political momentum to pass the necessary constitutional amendments.

JEL classification: H10, H50, H60, H62, H63, H77