Pandemic pushes German regional government debt higher

4 Feb 21

Covid-19 spending and lower revenues have weakened German states’ finances and forced them into debt, according to the latest government figures and analysis from ratings agency Fitch.

The Länder, Germany’s 16 partly sovereign states, reported an overall deficit of around €42bn in 2020, following a surplus of €13bn the previous year, according to data from the finance ministry.

Tax revenue dropped by 4.9% to €294.4bn, although total revenue increased to €430.5bn, buoyed by transfers from the federal government.

Expenditure, however, rose by 20% to €472.4bn as the Länder fought the pandemic, implementing contact tracing and administering vaccines, and increasing spending on welfare and unemployment insurance payments.

The resulting deficit has increased the debt held by the Länder by 7.7%, to €569bn.

“Bund and Länder have agreed that the cost of tackling the Covid-19 pandemic justifies suspending the debt brake agreement, which would have prohibited any Land running a structural budget deficit from 2020, and which now appears unlikely to apply before 2022,” Fitch said in a statement.

“Additional funding requirements have not affected Länder’s debt market access or borrowing costs, reflecting their status as Europe’s largest subnational borrowing group, enjoying frequent and reliable market access.”

Fitch said it expects debt to rise again in 2021, although by a lesser amount than last year.

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