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1.Overview

1.1.The legal framework governing budget processes

Germany has a very comprehensive and detailed legal framework for budget processes at different levels of government. The Basic Law (Grundgesetz

– hereafter GG) or Constitution, defines the roles of the key actors in budget processes. The GG lays out in some detail the respective fiscal responsibilities of the Federation and the Länder (states). It establishes that the Federation and the Länder independently prepare, adopt and execute their own budgets. The GG also contains an entire chapter devoted to budget management.

The Constitution is supplemented by a very solid body of laws (Box 1) and regulations. The most important budget laws date from the late 1960s. These lay out budget principles consistent with macroeconomic stability. A distinguishing feature of Germany’s legal framework is the Law on Budgetary Principles (Haushaltsgrundsätzgesetz – hereafter HGrG), which is applicable not only to the federal government, but also to the independent Länder governments and all local governments (Gemeinden – municipalities). Part 1 of the HGrG lays out obligations concerning budget preparation, budget execution, government accounting, and independent external audit. The legal

Box 1. Germany: Main budget system laws

●The Basic Law (the “Constitution”), 1949 – Grundgesetz, GG.

●Law to Promote Economic Stability and Growth, 1967 – Stabilitätsund Wachstumsgesetz, StWG.

●Law on Budgetary Principles, 1969 – Haushaltsgrundsätzgesetz, HGrG.

●The Federal Budget Code, 1969 – Bundeshaushaltordnung, BHO – and the 16 Länder budget codes.

●Federal Court of Audit (Bundesrechnungshof) Act, 1985.

●The laws on intergovernmental relationships – especially the solidarity pacts and the Law on Equalisation Grants from federal to Länder governments.

●The laws establishing social security funds.

S o u rc e s : Tschentscher (2002); Federal Ministry of Finance (1995 and 2000); www.bundesrechnungshof.de/en/veroeffentlichung/800.html.

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requirements of the HGrG are elaborated further in individual budget codes – one for the federal government (the Bundeshaushaltordnung – hereafter BHO) and a separate code for each of the 16 Land. Each code has the status of law. The Länder budget codes contain broadly similar provisions to those in the federal code – since all are based on the common framework of the HGrG. Länder budget codes – including those for the former East Germany – are not reviewed in this study.1 In 1985, the Federal Court of Audit Act was adopted to clarify governance structures and procedures for the external audit.

In contrast to some federal countries that do not have formal arrangements for fiscal policy co-ordination between different levels of government, there is a constitutional requirement that budget management of the Federation and the Länder take account of the need for macroeconomic equilibrium (GG, Art. 109). The Constitution also envisages the adoption of a federal law, applicable to both the Federation and the Länder, to govern budgetary management and to ensure multi-annual financial planning. Accordingly, the Law to Promote Economic Stability and Growth (Stabilitätsund Wachstumsgesetz – StWG) requires the formulation of five-year plans. The law also promotes responsible fiscal management: both the federal and Länder governments are obliged to consider nationwide objectives when formulating their economic and fiscal policies. The StWG incorporates strict Keynesian economic theory that was widely accepted when the law was adopted in 1967. Some of this law’s provisions, including the establishment and use of a counter-cyclical reserve fund to prevent overheating of the economy, are of little relevance when high unemployment and below-potential growth characterise the economy.2 Also, the maintenance of counter-cyclical reserve funds that do not earn interest, as required by the GG [Art. 109(4)], is a questionable cash management practice.3

To ensure intergovernmental co-ordination, the StWG (s. 18) and the HGrG (Part 2) establish a co-ordinating body, the Financial Planning Council (Finanzplanungsrat). This body comprises the federal Ministers of Finance and of Economics, the Länder Ministers of Finance, and four representatives of municipalities designated by the Bundesrat (the second parliamentary chamber, representing Länder interests, see section 3.1.1) at the suggestion of local government associations. A principal aim of the Financial Planning Council, as a co-ordinating body, is to prepare coherent medium-term financial plans and to set priorities for nationwide fiscal policies. Under the HGrG, all levels of government are obliged to supply the Financial Planning Council with all information necessary for carrying out its functions. Länder must provide all relevant information on behalf of municipalities. All public law entities and all social insurance institutions – at both federal and Länder level – are also included in the reporting requirement. Thus, the Financial Planning Council is able to obtain all the information necessary for monitoring

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budgetary developments for the nation as a whole.4 Decisions of the Financial Planning Council are politically binding, but not legally binding.

The concept of Rechtsstaat – or rule of law – is very well-developed, with the law and legalistic approaches to public administration being very important. The Constitution requires the government to obtain the consent of the Bundesrat before issuing general administrative rules (GG, Art. 84), as well as stating that “federal supervision covers the lawfulness and appropriateness in execution of the administrative rules” [GG, Art. 85(4)]. The civil service, which is established by separate laws, takes pride in serving political authorities in a professional manner. Entry to the civil service is easier if one has legal training.

Despite the rule of law and the accompanying strong emphasis on ensuring that proper legal structures are in place, some budget decision making takes place outside the formal constitutional framework. This is largely a consequence of party politics and the need for coalition governments. Coalition agreements between the governing parties lay out a framework for budgetary policies. Since the 1990s, such agreements have become increasingly detailed and may even incorporate fiscal rules in addition to the Constitution’s “golden rule” (see section 1.2). Although these agreements are not legally binding and may not be respected,5 they nonetheless constitute an important informal framework to supplement the formal legal framework for budget processes. Pre-Cabinet decision making is a second area where less formal arrangements, dictated by the needs of party politics, supplement the legalistic framework. Negotiations between ministers outside formal Cabinet meetings may bring a consensus on controversial budget issues prior to formal decision making in Cabinet. Key decision makers are party heavyweights, who may or may not be members of the Bundestag (see section 3.1.1) or even the government (Sturm and Müller, 2003, p. 194).

Finally, Germany is a member of the EU, for which budgetary rules for macroeconomic stability have been issued. In particular, the “Maastricht criteria” limit the general government fiscal deficit to a maximum of 3% of GDP and general government debt to 60% of GDP. These quantitative limits are not incorporated into domestic legislation. However, actual budgetary decisions reflect the interplay of power between political parties, especially those comprising the coalition government. Although the parliamentary budget (or finance) committees exert some influence, Parliament’s main role is largely limited to legitimising decisions already taken by the government coalition. Any non-respect of EU criteria reflects the difficulty of reaching a political agreement on legally-binding expenditure targets for the Federation and for each Land. Such targets are required for achieving overall targets for general government revenues, expenditures and deficit.6