IV. GERMANY

1.2. Reforms of budget system laws

Following World War II, the fiscal deficit was strictly controlled, as the Constitution allowed a deficit only in exceptional circumstances. However, in 1965/66, it was believed that balancing the budget during a recession was inappropriate. A window of political opportunity opened up to change the Constitution and adopt new budget laws that formally embodied the Keynesian economic thinking that was in vogue in the 1960s (for details, see Sturm and Müller, 1999, p. 70-71). The principle innovations were:

●In budget management, the federal and Länder governments were required to take into account the four macroeconomic variables, namely steady economic growth, stable prices, high employment levels, and external balance.

●Borrowing was allowed to finance investment spending (a “golden rule”).

●Annual budgets were to be formulated in the context of a medium-term plan covering five years.7

●The high-level Financial Planning Council was formed to co-ordinate budgetary planning nationwide and enable budget management at all levels to be assessed.

●A detailed budgetary classification and a uniform cash-based accounting – to be used at all levels of government – were introduced.

●A parallel budget – financed from carried-over cash reserves – was eliminated. Carryover of unused funds was curtailed.

Since these reforms were adopted, Germany has maintained a detailed line-item budget system, although in late 1997, the Law Adapting Budget Legislation of the Federation and Länder was adopted. This law (which amended the HGrG and the BHO) provides for:

●an extension of the eligibility for transfers of budget authority to allow greater flexibility in budget management by spending ministries;

●an easing of end-year carryover rules;

●greater incentives to budgetary bodies to raise additional revenues;

●cost-benefit accounting for central government budgetary activity;

●an obligation to conduct an efficiency analysis for all measures having a budgetary impact.

Unlike other countries, there has not been a nationwide movement towards performance-oriented budgeting, with an accompanying reform in the cash-based accounting system. Nonetheless, in 2000 pilot “product budgets” were launched, with six federal agencies being included in 2004 (Federal Ministry of Finance, 2004). The aim is to add an output orientation to the input-oriented budget. The product budget, which is annexed to the main