By Judith Ugwumadu | 15 November 2013

German Laender remain on course to further improve their budgetary performance thanks to an increase in tax revenue, Fitch Ratings agency said today. 

According to the agency, the key to sustainable improvements in budgetary performance would be a ‘reduction in structural deficits through cost consolidation’. The agency said that it believed the Laender would continue to implement these measures.

But progress towards the balanced budgets required by 2020 would continue to vary state by state, Fitch added.

‘There may be some fiscal slippage at those Laender whose budgetary outperformance means they are ahead of schedule, which may allow capital spending to rise because delaying compliance would not push them back beyond the original deadline.

‘But our expectation is still that consolidation will continue, reflecting the constitutional status of the debt brake and broad political support for consolidation in the Laender.’

Germany’s Ministry of Finance Quarter 3 data showed that tax revenue jumped 4.5% quarter-on-quarter, increasing by €7.1bn to €166.6bn. This, combined with previous cost-cutting and falling interest expenditure reflected the Laender’s ‘sophisticated’ debt management and low interest rates. The agency said this enabled the 16 German states to ‘significantly’ reduce their net funding deficit to around €800m in the quarter, down €4.2bn a year earlier.

Fitch continued: ‘Overall, the Laender look very likely to reduce their aggregate deficit again this year, from the €5.6bn reported at end-2012. As in last year, the final outcome will be considerably below the very conservative forecasts that the Laender produced at the start of the year.’

Looking ahead, German’s Working Party on Tax Revenue Forecasting predicts tax revenue to rise steadily until 2018, by 3% to 3.6% a year. Fitch Ratings said this would reflect economic growth and it forecasts gross domestic product to increase by 1.5% next year and in 2015.