Decomposing total tax revenues in Germany

With the start of the new decade, budgetary planning in Germany is becoming more demanding. First, public finances need to be consolidated after the economic crisis. Second, Germany introduced a deficit rule into its Constitution in 2009, which prescribes stringent structural deficit ceilings for different levels of government and limits possibility of budgetary overruns. This requires prudent budgetary planning. However, fiscal planning is difficult since the link between total tax revenue and economic activity is unstable. This Country Focus identifies three key drivers behind developments in total tax revenue. The first is the composition of the GDP growth. If economic growth is driven by less "tax-rich" components, such as exports, the revenue- to-GDP ratio tends to decline even without any discretionary policy which constitutes the second factor. At the same time, with more frequent and complex policy interventions, the budgetary impact of discretionary measures is difficult to estimate. In addition, direct and indirect tax receipts are also affected by fiscal drag effects or changes in the behaviour of tax-payers. The new fiscal rule could help give budgetary policy a longer-term orientation, as it necessitates a clearer and stable fiscal strategy. Given non-negligible residual effects in the past and the risk that unexpected developments might lead to high consolidation requirements, the new rule necessitates greater fiscal prudence ex ante.