1. 17./18.09.2009 – Expert meeting on grants design, Copenhagen Carinthian University of Applied Sciences, Villach, Austria Carinthian University of Applied Sciences, Villach, Austria Dr. Nils Otter Structure and Developments of the Grants System in Germany Expert meeting on „General Grants vs. Earmarked Grants: Theory and Practice“, Copenhagen 17.09.2009

2. 17./18.09.2009 – Expert meeting on grants design, Copenhagen General principles of grants design More a political question than a normatvie one If the question is conditional vs. unconditional grants, then the answer depends on the level of government: I.Higher tiers prefer conditional grants because they want to influence the production of public goods II.Recipient governments favour unconditional grants because they want to have more autonomy

3. 17./18.09.2009 – Expert meeting on grants design, Copenhagen Federal-States-Level System of tax sharing → general revenue → VAT sharing is the most important instrument for adjustments with regard to changing responsibilities Horizontal fiscal equalization between the states: → unconditional grants → negative incentive effect of recipient governments Supplementary federal grants: → last step in the system of fiscal equalization → unconditional grants

4. 17./18.09.2009 – Expert meeting on grants design, Copenhagen Supplementary Federal Grants Unconditional grants for special needs to the states level: 1.Further equalization of fiscal capacity 2.Costs of political system 3.Transition grants for “old” states 4.Special needs grants for “new” states 5.Grants for budget consolidation Change in 2005 1.Further equalization of fiscal capacity 2.Costs of political system 3.Grants for structural unemployment 4.Special needs grants for “new” states

5. 17./18.09.2009 – Expert meeting on grants design, Copenhagen Supplementary Federal Grants 2000 Recipient stateEqualization of financial capacity Cost of political systemTransition grants for “old” states Special need grants for “new” states Grants for budget consolidation Lower Saxony841-129-- Rhineland-Palatinate430112116-- Schleswig-Holstein2648458-- Saarland1147820-537 Bremen846420-818 Berlin481112-1.361- Saxony475--1.870- Saxony-Anhalt28184-1.129- Thuringia26084-1.027- Brandenburg27784-1.015- Mecklenburg-Western Pomerania 19084-765- Total3.6967863447.1581.355

6. 17./18.09.2009 – Expert meeting on grants design, Copenhagen Supplementary Federal Grants 2005 Recipient stateEqualization of financial capacity Cost of political system Grants for structural unemployment Special need grants for “new” states Lower Saxony197--- Rhineland-Palatinate15346-- Schleswig-Holstein7953-- Saarland5363-- Bremen12160-- Berlin76843-- Saxony385263192.003 Saxony-Anhalt222531872.746 Thuringia217561761.657 Brandenburg224551901.509 Mecklenburg- Western Pomerania 161611281.110 Total2.5795171.00010.553 Source:Bundesfinanzbericht 2008, p. 151-154.

7. 17./18.09.2009 – Expert meeting on grants design, Copenhagen States-Local-Level Grants to the local level are financed by the so- called Equalization Fund → single-sided determined by the state → “reserve cash box” for state government Horizontal grants distribution: → unconditional grants by formula → conditional by decision of state governments Stable relationship: → 60% unconditional, 40% conditional → raising amount (due to raising tax revenues)

8. 17./18.09.2009 – Expert meeting on grants design, Copenhagen State revenues Tax sharing arrangements Specific need grants Conditional grantsUnconditional grants MunicipalitiesAdministrative Districts Boroughs Formula grants Equalization fund Local revenues fiscal capacity < fiscal need

9. 17./18.09.2009 – Expert meeting on grants design, Copenhagen 2003 2007 Mrd. €in % of all grantsMrd. €in % of all grants Total of state grants46,6100%56,7100% Unconditional27,057,9%32,757,6% Compensation for tax losses [1] [1] 1,22,6%3,56,2% Formula-based grants21,546,1%24,342,8% Special needs grants0,30,01%0,30,01% Others4,08,6%4,68,1% Conditional19,642,1%24,042,4% Grants for state services5,211,1%8,114,3% Grants for current purposes6,714,4%8,214,5% Grants for debt service0,00%0,00% Grants for investments7,716,6%7,613,4% Source:Own calculation based on Bundesministerium der Finanzen (several years): Bundesfinanzbericht, p. 158/168. Grants between the State-Local level

10. 17./18.09.2009 – Expert meeting on grants design, Copenhagen The local perspective New responsibilities on the local level: Child care program Transfers for poor elderly people Social aid Danger of unfunded mandates: Due to the model of administrative federalism, conditional grants play the role of cost compensation Higher level government raises standards in public services Equalization grants of local level is in strong dependence of the states fiscal ability

11. 17./18.09.2009 – Expert meeting on grants design, Copenhagen Conclusion Main trend: → grants for the delivering of federal/state public goods are raising → result of administrative federalism Economic theory offers sophisticated reasons → but: grants are used in order to reach state goals (paternalism) → federal decision (equity reasons), but local provision (efficiency reasons)  RattsØ might be right!