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make transfers according to specific purposes – for example, public transportation (GG, Art. 106a). It can also compensate Länder or Gemeinden for special burdens imposed on them [GG, Art. 106(8)].

The Constitution stipulates that, in principle, each level of government should independently finance the tasks it is obliged to perform, in order to ensure efficient and effective performance. Expenditure assignments for the Federation and the Länder are specified in the Constitution. Major competences of the Länder comprise education, university systems, and health. However, in these and other areas such as social security, expenditure competencies of the Federation and sub-federal governments overlap. Also, the Constitution provides that the Federation pays the Länder for tasks executed by the Länder either on behalf of the Federation, or for which the Federation has a legal cofinancing responsibility (GG, Arts. 91a, 91b and 104a). Importantly, many investment projects are jointly financed by the Federation, the Länder, and/or the Gemeinden. Finally, about one-third of total government spending (excluding transfers) is conducted by sub-federal governments, considerably lower than in some federal OECD member countries (for example, Canada, Switzerland) but higher than Austria (OECD, 2003, Figure 1).10

Länder constitutions, the HGrG and individual Land budget codes lay out the legal obligations for budget preparation, execution, accounting and audit. Although the system of intergovernmental budgetary relations is complex,11 it is understood by the various actors, in part because of the crucial role of the Financial Planning Council as a co-ordination body between the Federation and the Länder.

4. Legal provisions for each stage of the budget cycle

The HGrG provides not only principles, but also some detailed legal obligations applicable to both federal and Länder budgets. All stages of the budget process are covered by the HGrG, except for the parliamentary approval stage. The same stages are elaborated in the 17 budget codes, which have the status of law. Only extracts from the code applicable for the Federation (BHO) are reported below.

4.1. Budget preparation and presentation by the executive

Laws specify procedures for preparing and approving the draft budget law within the executive. This contrasts with most other countries, where executive decrees and/or conventions guide the budget approval process within the executive.

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4.1.1. Institutional coverage of the budget

Budgets at each level are prepared and adopted independently. The institutional units comprising “government” at each level are not enumerated in law. The official statistical definition (finanzstatistische Abgrenzung) is the primary standard used for establishing the coverage of institutional units at each level of government. Coverage and reporting standards are laid out in administrative regulations.12 The consolidated budgets of all governments include all institutions that follow cash-based government accounting principles, but exclude institutions and enterprises that are legally independent and use commercial accounting.13

4.1.2. Extrabudgetary funds and earmarking of revenues

The principle of general coverage that “all revenue shall serve all expenditure” is included in the GG and the BHO. However, the Constitution allows the establishment of federal special funds, where “only allocations to and revenue from them need be included” in the budget (GG, Art. 110). Also, “revenue may be earmarked for use for specific purposes if this is stipulated by law or if exceptions have been provided for in the budget” (HGrG, s. 7). For such funds, only outflows from, or contributions to, the Treasury are to be taken up in the budget (HGrG, s. 18).

On the basis of these laws, separate laws have established the major social security funds, for which there are approximately 720 institutions (IMF, 2003, paragraph 4). There is usually a legal requirement for these funds to be balanced. To achieve the zero deficit target, for some funds (for example, pension funds), the law specifies the formula for transfers needed from the federal government to cover annual operating deficits. The transfers to such funds are appropriated in the federal budget. However, the revenues and expenditures of the funds are approved by a governing board. These are not shown in the annual federal government budget.

Extrabudgetary funds, whose number and size has varied over time, are also used extensively for off-budget activities. After reunification in 1991, there was an initial boost in the number and size of such funds, which contributed to the growth of the general government deficit (Sturm and Müller, 2003, table 4.4). The deficits of extrabudgetary funds are not subject to the deficit-limitation requirements of Article 115 of the GG (Burmeister, 1997, p. 227). In 2003, there were about 42 extrabudgetary funds: 16 at federal level and 26 at Länder level.14

4.1.3. Definition of budget aggregates

The Constitution specifies which revenues accrue to which level of government and which are shared. All tax and non-tax revenues are specified

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(GG, Arts. 106-107). The Constitution also states that “budget revenue and expenditure shall be balanced” [Art. 110(1)], although it does not elaborate on what “balance” means.

The HGrG defines what is meant by ex ante “financial balance” – the difference between revenues and expenditure (with both excluding clearly specified financing transactions) [HGrG, s. 10(4)]. The counterpart – the “borrowing plan” – is defined as the revenue from loans minus debt repayments. Revenues of departmental budgets include taxes, administrative receipts, proceeds from asset sales and revenues from non-liquid loans. Expenditures are defined by economic object: personnel, current goods and services, debt servicing, grants and subsidies, and investment, with further details provided in the HGrG [s. 10(3)].

The BHO defines not only ex ante financial balances (as in the HGrG, see above), but also an ex post “surplus or deficit, which is the difference between actual revenue and actual expenditure” (Art. 25). Any surpluses arising from past budget execution “shall be used, in particular, to reduce the borrowing requirement, repay debts, or allocated to the reserve for counterbalancing economic trends”. Any deficits are to be covered principally by borrowing (compare HGrG, s. 17).

4.1.4. Fiscal rules

The “golden rule” embedded in the Constitution states that “revenue from borrowing shall not exceed the total expenditure for investment provided for in the budget estimates” (GG, Art. 115). Similar “golden rules” are written into Länder constitutions. The federal Constitution allows two exceptions to the golden rule: 1) to avert a disturbance of macroeconomic equilibrium; and 2) for special funds that may be authorised by federal legislation. The second exception was used in the early 1990s, when off-budget funds were used to meet the acute financial needs of the eastern Länder.

There has been a debate on the definition of investment – what it covers and whether it should be on a gross or net basis.15 In 1989, the Constitutional Court, in commenting on the constitutionality of the 1981 deficit, requested Parliament to develop a more precise definition of investment. To date, this has not been done in new legislation (although the HGrG was changed in 1990 to require explanatory notes to be attached to the budget in the case of “unavoidable” deficits). Investment is based on a gross concept: it includes not only gross purchases of fixed assets but also transfers and subsidies in support of investment (IMF, 2003, Box 2). Using a gross rather than a net concept is consistent with Germany’s cash-based accounting system, in which depreciation and other capital charges are excluded from current expenses.

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Until 2002, law did not specify that budgetary projections should be drawn up taking into consideration its European obligations. However, since 2002, the HGrG (s. 51) requires the “maintenance of budgetary discipline within the framework of European Economic and Monetary Union”. The Financial Planning Council, whose secretariat is based in the Federal Ministry of Finance, shall take into consideration economic and fiscal factors and then make recommendations regarding budgetary discipline. It examines budget proposals – in particular it will recommend a common expenditure course – in the light of EU requirements on deficits and debt for general government, i.e. federal plus Länder plus Gemeinden, inclusive of all extrabudgetary funds. In transmitting general government budget plans to the EU, the Federal Ministry of Finance converts national budget accounting data to the international norms specified in the European System of Accounts.

4.1.5. The timetable for budget preparation and presentation to Parliament

For the federal budget, the BHO requires that “the draft budget law be submitted to the Bundestag and Bundesrat, together with the draft budget, before the beginning of the fiscal year. As a rule, this should be not later than the first week of the Bundestag’s session following September 1” (Art. 30). To reach this deadline, the BHO also requires that estimates shall be submitted to the Federal Ministry of Finance by the agency responsible for the departmental budget on the date that shall be determined by the Ministry (Art. 27). This date is typically in early March. However, the budget preparation process begins about three months earlier, when the Federal Ministry of Finance sends the annual budget circular to departments. This includes an updated five-year financial plan and guidelines for preparing draft annual budgets.

4.1.6. Approval process within the executive

The Federal Ministry of Finance is required by law to scrutinise the estimates received from departments, amend them (in consultation with the departments) and prepare a draft budget [BHO, s. 28(1)]. Once prepared, the Federal Ministry of Finance transmits the draft budget to the Federal Chancellery, for approval in Cabinet. A federal minister may obtain a decision by the federal government on matters with considerable financial implications. If such decisions go against the opinion of the Federal Minister of Finance, he/she may challenge the government decision. Procedures are detailed in Rules of Procedure of the federal government [BHO, s. 28(2)]. These legal provisions reflect the possibility that not all budget conflicts are resolved at a technical level and may need resolution at ministerial level. Following these steps, the draft budget law and budget are adopted by the federal government [BHO, s. 29(1)]. This is typically in early July.

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Unusually, the law requires the external audit office to receive the draft budget estimates from ministerial departments. The Federal Court of Audit may comment on them [BHO, s. 27(2)]. Typically, representatives of the Federal Court of Audit attend budget negotiations in an advisory capacity at divisional level, but they do not take part in negotiations at higher levels, where decisions are increasingly motivated by policy considerations.

The law also specifies internal administrative arrangements: “Every agency that administers revenue and expenditure shall appoint a finance officer unless this task is assumed by the head of the agency. The finance officer shall be directly subordinate to the head of the agency. The finance officer shall be responsible for the preparation of documents required for financial planning and for the draft budget estimates. The finance officer is also responsible for executing the budget, a task that may be delegated” (BHO, s. 9).

4.1.7. Documents to accompany the budget law

Medium-term macroeconomic framework and fiscal strategy. To accompany the budget debates in Parliament, the law requires that a five-year financial plan (quantitative estimates of the fiscal policy strategy) be submitted to the legislative bodies, at the latest upon submission of the draft budget (HGrG, s. 50). The financial plan is adopted only by the government (StWG, s. 9). Its presentation to Parliament is for information only. The first year of the financial plan is specified to be the current financial year. The second year is the budget year, leaving a further three years beyond the budget year. The law assigns responsibility to the Federal Minister of Finance for drawing up the financial plan and updating it annually in line with economic developments (StWG, s. 9). Federal ministers are to draw up investment programmes in their areas of responsibility. These are to show, for each year, direct spending on projects, as well as federal financial aid for third-party investment (StWG, s. 10).

For the federal government, the Federal Ministry of Finance is required to present, with the draft of the federal budget law and the draft budget, a report on the current state of public finances and their likely impact on the economy as a whole (BHO, s. 31). This Finance Report is a key budget document, as it provides extensive information for an assessment of the budget proposal. The law does not specify its contents. It typically contains summary tables and explanations of the budget; the medium-term federal finance plan; a description of the macroeconomic context and tax policy; a description of the financial interrelationships of the Federation, Länder, and Gemeinden; financial relations with the EU; debt, commitments, and obligations of the Federation; information on federal special purpose funds; and an overview of government assets and privatisation activities.

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Concerning the medium-term financial plan, by convention (not law), the Federal Ministry of Finance:

●prepares macro variables based on likely developments in the first two years and cyclically-neutral economic growth developments in the three later years;

●distinguishes between expenditures for which a definite provision must be made and expenditures where a global provision is made (for example, for salaries);

●for both revenues and expenditure, may incorporate planned policy changes – but not explicitly – into the projections;

●does not strongly link annual budgets with medium-term financial plans.

The published financial plan contains about 40 functional categories of expenditure. However, detailed estimates for the 7 000-8 000 expenditure titles and 1 100 revenue items are prepared within the administrations of the Federation, each Land and all Gemeinden, since all are obliged to participate in the medium-term planning exerucise.

New measures versus existing expenditure policies. For investment spending, the law requires detail on both new projects and ongoing projects (StWG, s. 9). Such a distinction is not made in the law for current expenditures of the proposed budget.

Performance-related information. Budgets for each department are drawn up using detailed economic and functional classifications. Appropriations are not on an explicit programme and activity/project basis. Hence, the law does not require (programme) performance indicators to accompany budget submissions.

Tax expenditures, contingent liabilities and fiscal risks. Every two years, the federal government is required to submit to the Bundestag and the Bundesrat, along with the budget estimates, a survey of financial aid to agencies outside the federal administration, listing separately the financial support to enterprises or sectors of the economy. A survey of tax concessions to industries, including an estimate of revenue foregone, is required (StWG, s. 12). This law requires an assessment of when it would be desirable to remove tax concessions and subsidies to industry, with government making legislative proposals.

Concerning contingent liabilities, the Constitution requires federal legislative authorisation for the assumption of guarantees or other commitments necessitating expenditure in future fiscal years (GG, Art. 115). Because of this constitutional requirement, full information is made available on contingent liabilities, including budgetary subsidies needed when loan guarantees are called up.

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There is no legal requirement to present a risk assessment in the budget and the budget does not include a detailed risk analysis. Any published budget estimates on fiscal risks tend to be rather general (IMF, 2003). Also, there is no legal requirement to prepare periodic long-term projections of revenues and expenditures which would enable the risk of uncertain demographics on the costs of present social transfer programmes to be identified.

Other information required by law. By law, three budget annexes are required at all levels of government (HGrG, s. 11; BHO, s. 14). First, an annex must contain descriptions of revenues, expenditures, and future commitments classified by object (economic classification) and by function, with a matrix showing cross-classification of these two classification systems. This applies to revenues, expenditures and authorisations of future commitments. Second, a summary of self-balancing items is required. Third, a summary of posts of established civil servants, unestablished salaried staff and wage earners must be shown.

For indirect agencies (see Box 2) and special funds, net flows only are shown in the budget law. The law requires – as budget annexes or explanatory notes – summary information on the funds’ revenues, expenditures and authorisations of future commitments (HGrG, s. 18; BHO). For such agencies, the established positions of civil servants must be stated in the budget. The BHO requires similar summaries of revenues and expenditures for: 1) public law entities that are fully or partly supported by the federal government, and 2) agencies not belonging to the federal administration, but which receive allocations from the federal government. The Federal Ministry of Finance is authorised to permit exceptions to the reporting requirements for agencies of the second category.

4.1.8. Budgets of Parliament and other constitutional bodies

Constitutional bodies are financially independent. The law makes provision for possible budgetary disputes between the Federal Ministry of Finance and the draft budget estimates of the Federal President and the presidents of the Bundestag, the Bundesrat, the federal Constitutional Court, and the Federal Court of Audit. In particular, “the Federal Minister of Finance shall notify the federal government of any deviations” [BHO, s. 28(3)] and if the draft budget deviates from the estimates of these five constitutional bodies, and if differences have not been resolved, then the sections on which no agreement has been reached shall be attached to the draft budget [BHO, s. 29(3)].