Germany has achieved a high level of fiscal transparency, according to a 2003 assessment by the International Monetary Fund (IMF). The existing laws and regulations governing the fiscal system are strong, with fully transparent standards in place. There are clear guidelines to budgeting, accounting, and reporting at all three levels of the government, Bund (federal government), Länder (states), and Gemeinden (municipalities). Fiscal policy is decentralized among the three layers of the government but operates under a shared legal framework. The regulatory environment around the fiscal system is positive, but it remains difficult to understand due to its complexity. Partially due to this institutional and legal complexity, the IMF found that there were insufficient consultations during budget preparation, a lack of detailed analytical reports, and difficulty in comprehending the fiscal system as a whole.

General Overview

In 2003, the International Monetary Fund (IMF) carried out a Report on the Observance of Standards and Codes (ROSC), benchmarking German fiscal policy practices against the IMF's Code of Good Practices on Fiscal Transparency. The assessment's overall verdict was that "Germany has achieved a high level of fiscal transparency" (p.32). According to the IMF, strict regulations and sound governing laws are in place to implement fiscal management. The planning and execution of the budget are done through highly transparent standards; and there is accountability to parliament and the public whenever government funds are being used. There is a common legal framework for the fiscal system shared at all government layers, the Bund (federal government) the Länder (regional states) and the Gemeinden (municipalities). The overall framework includes parts of the constitution related to the fiscal system, assignment of revenues and expenditures responsibilities, principles of budgeting and accounting, and tax and civil service legislation. According to the IMF, Germany's fiscal system meets international standards, particularly in the following areas: (a) the budget is prepared and approved through a strong apparatus that ensures sufficient consultation among all parties; (b) all components of the budget are executed following a strict set of guidelines; (c) fiscal reporting is comprehensive; and (d) there is an efficient external audit body that undertakes accountability and performance issues.

The 2003 ROSC notes that although the German fiscal system is robust and has many positive features, there are still some limitations. The IMF believes that the importance placed on accountability and legal obligations should not override the availability of fiscal data and their corresponding analytical reports. Furthermore, the intergovernmental consultative process that takes place during the budget planning period is inadequate, resulting in "insufficient overall planning for the general government and lead[ing] to intransparencies in the decision processes and in the ultimate allocations of resources and responsibilities among different levels of government" (p. 33). Also, a large number of fiscal laws and regulations clearly define the rights of all stakeholders, but nonetheless make it difficult for the public to participate due to the highly complex and cumbersome legal framework. It is hard for the public to fully understand the tax system and the regulation surrounding it, which has led the IMF to advise simplification of the tax code.

In its 2003 ROSC for Fiscal Transparency, the IMF recommends that the budget documentation include more information on the macrofiscal strategy as well as the public policy goals, instead of relying strictly on cash numbers which offer limited information in this regard. The IMF further recommends the inclusion of an analysis of the medium-term structural trends and a comprehensive risk analysis. In addition, there should be an appraisal of the anticipated value of government guarantees, and the budget's presentation should include a statement of objectives and priorities. Also, budget forecasts should be in the course of the budget the year. Additionally, in the Concluding Statement to the 2007 Article IV Consultation, the IMF recommends that the government use the second phase of the fiscal federalism reform to increase efficiency and reduce long-term risks to the budget. It further calls for the timely provision of consistent data related to Länder finances, to ensure transparency and sound monitoring, and suggests the introduction of a new fiscal rule that would help achieve a structurally-balanced budget.

The IMF's Concluding Statement to the 2007 Article IV mission adds that "the fiscal position is in the best shape since unification." However the IMF staff notes that the reform and policy agenda in the area of fiscal policy are still incomplete. One way to remedy this is through the provision of personal and corporate tax rates cuts to help improve the business environment. The statutory requirement for the "Golden Rule," whereby an increase in federal debt cannot be larger than overall federal investment, has not been fully enforced. It was confirmed to the IMF visiting mission that plans are underway to change the "Golden Rule" in order to align it with the Stability and Growth Pact (SGP) of the European Union.

In the same statement, the IMF assesses the economy as strong. Signs of positive GDP growth are coupled with a lower unemployment rate and limited losses with regard to the global credit crunch. Germany's 2007 GDP growth is expected to be 2.5%, and only two banks have heavily suffered from the US subprime mortgage crisis. Also, in its 2007 Financial Stability Review, the Deutsche Bundesbank asserts that despite the credit turmoil and the increase in oil prices, the German economy remains resilient. However the report predicts that if global economic uncertainties persist, occasioning further losses incurred from the credit crunch, the German economy will be affected -- but not to the extent of facing a recession. The strength of the German economy is further evidenced by German Bundesbank's positive assessment of the public finance environment. For the first time since unification, the country is set to balance the budget. This is mainly due to structural improvements, the increase in the VAT at the beginning of 2007, and reductions in expenditure due to increased growth. The Maastricht Treaty and the Stability and Growth Pact require Germany to limit its budget deficit to 3% of the GDP and the debt to 60% of the GDP. Germany is close to achieving the latter objective, as the debt ratio -- which was at 67.5% in 2006 -- was significantly reduced in 2007. According to the German Bundesbank, tax revenues are set to rise in 2007 as a result of the increase in the insurance tax, turnover tax, and income and earnings taxes.

The Principles

Clarity of roles and responsibilities.

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According to the 2003 IMF ROSC, responsibilities within the government are generally well spelled out. The roles of the executive, legislative, and judicial branches are clearly stated in the constitution. Each branch is autonomous and acts independently of the others. The executive branch, through the Ministry of Finance, is responsible for drafting the budget, whereas approval is granted by the legislative branch. The coordination of budgetary activities is achieved through a series of laws including the Constitution; the Law on Budget Principles for Bund and Länder; the Federal Budget Code and the Budget Code for each Land; and Administrative regulations.

In the 2003 ROSC, the IMF notes that the taxation laws and regulations are ambiguous and hard to grasp. This has prompted the IMF to recommend that the tax system be simplified. The IMF notes that financial resources are often moved among the Bund, Gemeinden, and Länder. These activities are conducted using highly complex formulas and procedures for both revenues and expenditures. Revenues stemming from major taxes are shared among the three government bodies as, in principle, expenditures are self-financed at each government level.. Furthermore, the IMF staff states in the 2003 ROSC that "the Constitution and the Law to Promote Stability and Growth commit all levels of government to responsible fiscal management in support of macrofiscal targets. Article 109 of the Constitution requires Bund and Länder to take into account overall economic equilibrium when planning their budgets. The Bund is limited in its borrowing by the Golden Rule to the amount of the investment budget, and similar provisions restrict the borrowing by many Länder. Otherwise, both the Bund and Länder make borrowing decisions autonomously.

A 2003 empirical study by Alt and Lassen sought to determine if fiscal transparency is closely related to low public debt. Germany scored second lowest on the index (Japan scored lowest), achieving only 3 out of 12 on the index, along with other European countries like Switzerland and Norway. Alt and Lassen explain this performance, at least in part, to the complex distinctions of the German fiscal system.

Open budget processes

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According to the IMF's 2003 ROSC report, the budget is drafted following a clear timetable that allows for sufficient consultation with economic research institutes and advisory councils. In addition, different ministries prepare and submit their individual budgets to the Ministry of Finance, which determines the final draft budgets that are incorporated in the general government budget. Once the budget has been prepared, it goes to the Parliament, where it will be debated in a Budget Committee session with all ministries in attendance. Any changes resulting from consultations with Parliament are made by the Ministry of Finance. In its 2003 ROSC, the IMF states that "the budget classification meets international standards" (p. 23). There are clear instruments in place to ensure the proper management of itemized activities in the budget. The responsibility to prepare a budget falls on the executive branch of the government, whereas approval and supervision are provided by the legislature. Although the budget package comprises projections and discloses all assumptions to the public, there is no consultative mechanism in place to ensure that these assumptions and forecasts are fully and clearly discussed. Furthermore, no real risk analysis is provided, and the government is not legally obliged to issue one.

The IMF observes in its 2003 Report on Observance of Standards and Codes that the Bund's internal control procedures are highly efficient and the accounting system is able to report on arrears when they occur. The accounting system is advanced and can generate comprehensive annual budget reports. Parliament does not conduct a midyear review after the budget has been approved and has entered its execution phase. However, monthly status reports are submitted and parliament can at any time request information regarding any components of the budget.

Additionally, the 2003 IMF ROSC notes that the German tax administration enjoys legal independence and is not subject to political meddling. The audited final accounts of the Bund are available within nine months of the end of the fiscal year. According to the ROSC, "the Federal Audit Office informs the parliament of the findings of its financial and performance audits and the economic analysis of government activities for the budget year. The report is publicly available on the Federal Audit Office's website" (p. 29). Further, it is mandatory for Bund, Länder, and Gemeinden to prepare their budgets using a five-year timetable, and they must use these medium-term budgets in finance plans which cover the current year, the budget year, the three years following the budget year. The same IMF report states that estimates for important aggregates are planned for a 10-year horizon or even longer, and in the federal budget, the finance plan articulates the medium-term deficit objectives of the government and its plans for main budget categories.

Public availability of information.

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In its 2003 ROSC, the IMF states that information related to fiscal policy and activities of the government is readily available to the public. Information pertaining to general government debt and financial assets is also accessible by the public. Dates for the dissemination of fiscal information are announced in advance, and there is a strong commitment to the release of fiscal data on a regular basis. However the IMF also states that no information on future expenditures is provided for the general government, and only limited information is available on the budget and finance plan for the consolidated general government.

The 2003 IMF ROSC covers the steps involved in the completion of the budget package. Once generated, the Bund submits the budget to Parliament for approval. The package comprises the budgets for the different line ministries; the Finance Report, which includes a medium-term finance plan for the Bund and required information to conduct an appraisal of the proposed budget; and a draft budget law. In the budget document that goes to parliament, each budget item has corresponding figures for the previous two years as well as the totals covering three years post the current budget year. Parliament approves spending for only one year but the government generates a five-year plan given that it is the law for Bund and Länder.

Independent assurances of integrity.

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The 2003 IMF ROSC asserts that "budget data are reliable, and the variance between the budget and the actual outturn is publicly disclosed, both for the main aggregates and the detailed budget items" (p. 29). Germany is a subscriber to the IMF's Special Data Dissemination Standard and meets its requirements. According to the ROSC, the accounting system is cash-based and valuation for debt, assets and guarantee reports are conducted using book values.

Government accounts, the accounts of state owned companies and social security institutions, and those of any other body that receives funding from the government are verified by an external audit, according to the 2003 ROSC. All audits are presented to parliament, but those covering classified information are submitted to select committees only. Furthermore the report notes that the legislative branch ensures that external audit reports are taken into account and discussed in detail. There exists a high level of communication between the Federal Audit Office and parliament during all stages of the budget cycle. External auditors play a role in consultations that occur between the government and the parliamentary Budget Committee when the budget is in its preparatory phase. Data presented in the budget are judged highly reliable by the 2003 ROSC. However there is no mechanism in place to analyze fiscal outturns versus forecasts when discrepancies occur. Furthermore the statutory requirement for the "Golden Rule," whereby an increase in debt cannot be larger than investment, is not verified or accounted for.