In the state budget proposal for 2011, the government of the German state of North Rhine-Westphalia plans to reduce new debt only minimally. RWI, in contrast, recommends taking advantage of the favorable business cycle in order to cut significantly the structural budget deficit. NRW could, in this way, gain budget leeway, while at the same time prepare for the brake on spending, going into effect in 2020, which ultimately prohibits all structural debt.

The government of the German state of North Rhine-Westphalia is advised to begin making considerable cuts in the structural budget deficit in the current fiscal year. Structural debt refers to the gap in budget funding that is not attributable to business cycle factors. Reducing this type of debt should be just as high a priority as increasing investments in education and training, for example. Both activities are equally in the interests of young citizens. That is the position taken by RWI in the Institute’s current edition of RWI Position, entitled “The NRW Budget for 2011: Ostensible Success Toward Budget Consolidation” (Der NRW-Haushalt für das Jahr 2011: Scheinerfolge bei der Konsolidierung).

The state parliament in Düsseldorf will vote on the government bill containing the proposed 2011 budget on May 18. The final draft of the recommended resolution provides for borrowing 4.8 billion euros in net additional funding. That amount is just below the level of new debt incurred in the previous year, which was 5 billion euros. The supplementary budget for 2010 had in fact originally called for 8.9 billion euros in new debt, but the plan was rejected as unconstitutional by North Rhine-Westphalia’s Court of Constitution in December of last year.

NRW should take advantage of the favorable business cycle to cut the structural deficit

With the planned level of net funds to be borrowed, the current resolution contained in the budget bill for 2011 also does not comply with the state constitution, which limits borrowing to the amount of internally financed investments proposed in the budget, specifically 3.8 billion euros. The State Court of Constitution had once again ruled in December that exceptions to this rule were normally only permitted “in order to avert a disturbance of the macroeconomic equilibrium” or “in response to exceptional and special situations”. Neither condition currently exists, in RWI’s opinion.

RWI holds the “brake on spending”, defined in the German Basic Law since mid-2009, to be more significant for the economy. The provision requires the German federal states, as of 2020, to balance their budgets under normal circumstances without resorting to borrowing. Funds may then only be borrowed in order to counteract economic slumps, whereas budgets must then be balanced once again during upswings. That also implies the need for NRW to eliminate its structural debt by the end of 2019. According to RWI’s calculations, this type of debt accounted for more than 10% of adjusted expenditures in 2010. The 2020 budget, at the latest, has to provide additional funding for “investments in the future”, i.e. in education, research or childcare, from current revenues.

State budget contains additional potential for saving

The current level of debt of the state of North Rhine-Westphalia is about 130 billion euros, so that during the current year NRW will have to spend over 11% of its tax revenues to cover interest on the state debt. It is thus recommended that the additional tax revenues arising during the current growth cycle should not be used for increased expenditures that will continue to burden the state budget in the long term. This tax income should instead be employed to consistently reduce the level of new debt incurred. It is encouraging to note that the state government’s current budget proposal for 2011 implements this recommendation in part. However, in the view of RWI, effective consolidation needs to be much more closely targeted at expenditures. Much more potential for savings exists in this area. The state government could reduce the amount, set at 600 million euros in 2011, planned for assisting municipal budgets. Thanks to the economic upswing, municipal tax revenues are also increasing more strongly than expected and are already providing noticeable relief to municipal budgets. In addition, the state government has hiked real estate transfer taxes, with the municipalities participating in revenues from this tax. Other options would be to limit free kindergarten attendance to those families not able to afford the fees themselves, or models could be developed to have university graduates participate in their education costs.

For further information, please contact::
Dr. Rainer Kambeck Tel.: +49 201 81 49-235
Sabine Weiler (Press Office) Tel.: +49 201 81 49-213

This press release is based on RWI : Position #47 "Der NRW-Haushalt für das Jahr 2011: Scheinerfolge bei der Konsolidierung". It is available (only in German) as a pdf file at http://www.rwi-essen.de/positionen.