Budget crisis: Is Germany counting itself poor?

Household - Budget crisis: Is Germany counting itself poor?

It took weeks for the federal government to scrape together the missing 17 billion euros in the 2024 federal budget - with the result that consumers, who are already heavily burdened, will now have to pay the most. In 2024, heating, refueling and restaurant visits, among other things, will become more expensive for them.

A letter from the Federal Ministry of Finance now shows that the 17 billion could have been raised in other ways. The federal government would have calculated differently in the supplementary budget for 2023. The focus here is on the federal government's interest expenses. In 2023, these were estimated at 36.83 billion euros. However, according to a question from Left Party MP Christian Görke, it could have been just 19.84 billion euros, i.e. 16.99 billion euros less - if the federal government had spread the interest expenses over several years. The fact that the difference corresponds almost exactly to the missing 17 billion euros may be a coincidence. However, it could also give the impression that the state is paying itself into poverty.

The current situation is that the federal government is budgeting its interest expenses in one fell swoop. Why? Unclear - and probably more habit than best practice. Chancellor Olaf Scholz also did this during his time as Federal Minister of Finance. Many other industrialized nations, on the other hand, spread their interest costs over the term.

The state pays interest on bonds

Interest expenses are incurred, for example, when the federal government takes on new debt via federal bonds. The state pays interest on this. Federal bonds are issued on the stock exchange and are an important way for the Federal Republic to finance its debts. Other countries also finance themselves via bonds. Investors buy the bonds and receive constant annual interest from the state over their entire term. In Germany, bonds run for at least seven years.

The bonds have a nominal value, usually exactly 100 euros. At the end of the term, governments buy back the bonds at this nominal value. In the meantime, the prices of the bonds on the stock exchanges can fluctuate - for example to 95 euros or 105 euros. In the end, however, the issuer will still return the full 100 euros. So if an investor buys a bond at a price of 95 euros, he will still receive 100 euros back at the end of the term. In the meantime, he also receives a pre-defined interest rate.

Whether a bond is traded above or below its nominal value depends on the interest rate environment. In recent years, market interest rates have been extremely low, sometimes even negative. This has led to rising bond prices. A bond therefore cost more than its nominal value, for example 119 euros. The loss per bond therefore amounted to 19 euros at the end of the term. Nevertheless, bonds were attractive to investors because the state offered a better interest rate than the free market. Investors therefore accepted the higher price and paid the premium, in this case 19 euros.

What's more, the state was even able to issue the bonds above the nominal value and thus even earned money on its debt. These premiums are deducted from the interest paid. The higher these premiums are, the lower the interest costs in the budget. In this scenario, the previous accounting rule worked particularly well. This is because the more surcharges in a year, the lower the interest costs - although the model is finite.

The federal government's accounting principle distorts the budget situation

In other countries, however, the premiums achieved are spread over the entire term of the bond. If it runs for ten years, for example, the premium paid is also distributed over ten years in the state budget, in equal parts. In the example above, this would be EUR 1.90 for each year in which the bond matures. However, this principle is not applied in Germany.

In this country, the entire sum is booked to the federal budget in the year in which the bond was issued. The 19 euro premium from the example would therefore be booked all at once in just one year. In years with low market interest rates and high government interest rates, this results in a big plus in the budget.

This accounting principle means that the actual budget situation is distorted. Because what applies in one direction also applies in the other: If the market interest rate rises, bond prices fall. Since the ECB initiated the interest rate turnaround, there are no longer any premiums for the state, but the state itself has to pay on top. The market offers attractive alternatives in the form of fixed-term deposits, shares or corporate bonds. Although governments are considered solid, they are not necessarily lucrative borrowers. Government bond yields are now well below the competing alternatives. In order for the state to find buyers for its new bonds, it often has to sell them at below the nominal value of 100 percent.

For the federal budget, this means discounts, which - like the premiums - are all booked in the same year. To be more precise, these amounts are added to the government's interest expenditure. This is because, apart from premiums and discounts, the state must continue to pay the interest that it has promised in previous years. Now that it is not booking any surcharges, but at the same time paying the high interest on bonds from previous years, more money must be set aside in the budget for this.

According to Federal Finance Minister Christian Lindner (FDP), this amounts to just under 36.83 billion euros in the current year. However, if not everything was booked in one year, it could be 16.99 billion euros less, according to the letter to Christian Görke, a member of the Left Party.

Economically sensible: the accrual-based distribution of interest

This is where the missing difference of around 17 billion euros reappears. The ministry also calls this accounting option "accrual-based". This means that the premiums are distributed evenly over the entire term of the bond. From an economic point of view, this means that at the moment, the payments into and out of the federal government's coffers are taken into account, but not the actual income and expenditure.

Assuming the bonds run for ten years, the 17 billion euros must be divided by ten. Each year, 1.7 billion euros will then be booked in the budget - so up to 15.3 billion euros (17 minus 1.7 billion euros) could be saved in the supplementary budget for 2023. Purely through accounting.

Economists are nevertheless skeptical. "Changing the system now would be a break with the previous accounting logic," says Tobias Hentze, public finance expert at the Cologne Institute for Economic Research (IW). "I'm critical of doing this just because the Federal Constitutional Court has blown up the budget and we suddenly need money." From an economic point of view, however, Hentze believes that periodic accounting would be appropriate - as long as it is implemented systematically. "If you change the system, you have to allow it to go both ways. In recent years, interest rates in the budget were artificially low, now the opposite is happening."

The German Bundesbank also points out the possibility of distributing interest on an accrual basis in future. This could be implemented "without major difficulties", would be "economically more appropriate and would have several other advantages", it wrote back in 2021. In particular, it would make it easier to recognize the actual budget situation: "The budgetary burdens from interest would be stabilized, the budgetary results would be easier to plan and less erratic." The debt brake would also be better complied with. This is because years with high mark-ups provide relief for the budget, meaning that the debt brake would be "effectively undermined" and relaxed in the short term.

This has been the case in recent years because the level of surcharges has risen sharply. In the decade up to 2010, they averaged 500 million euros, the Bundesbank calculates. In the past decade up to 2020, it was already 4 billion euros. In 2020, a peak value of almost 12 billion euros was reached. This reduced interest expenditure in the budget by almost two thirds.

This article first appeared here in the business magazine "Capital", which, like stern, is part of RTL Deutschland.