Federal budget trends up to and including June 2020

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2. Supplementary budget for 2020

In response to the coronavirus pandemic, the Bundestag adopted legislation on 2 July 2020 to enact a second supplementary budget for 2020. Specifically, the 2020 target now provides for expenditure of €508.5bn for the economic stimulus package agreed between Germany’s governing parties. The original target of the 2020 federal budget, before the supplementary budget to deal with the coronavirus pandemic was enacted, was €362bn. Furthermore, lower levels of tax revenue, which had been forecast by the Working Party on Tax Estimates in May 2020, were taken into account. The new 2020 target puts new borrowing at an estimated €217.8bn.

The impact of the coronavirus pandemic is also clearly reflected in the year-on-year revenue and expenditure trends for the January–June period.

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Revenue

Federal revenue in the first half of 2020 totalled approximately €149.3bn, down by 12.1% (approximately €20.6bn) on the year. The consequences of the Covid-19 pandemic led in particular to a sharp decline in tax revenue compared with the same period in 2019. Tax receipts (including transfers of own resources to the EU) declined by 12.8% (approximately €19.9bn) compared with the first half of 2019.

Other revenue was down by 5.3% (approximately €0.8bn) on the year in the January–June period. This was primarily due to lower profits from undertakings and holdings and lower allocations from the Institute for Federal Real Estate.

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Expenditure

Federal expenditure in the first six months of 2020 totalled €200.1bn, up by 16.0% (around €27.6bn) on the year. The increase in spending in the January–June period is mainly attributable to a year-on-year rise of +17.4% (approximately €27.8bn) in consumption spending, excepting interest expenditure. Most of this increased spending consisted of immediate assistance for small companies and self-employed individuals affected by the fallout from the Covid-19 pandemic. A total of €15.2bn of the funds earmarked for this purpose were disbursed up to 30 June 2020. Compared to the same period last year, there has also been a considerable increase in spending (approximately €9bn) on protecting health and strengthening the health care system. Interest expenditure slowed the increase in consumption spending. In the January–June period, it was down 29.9% (about €3.6bn) on the year.

Investment spending totalled €12.9bn, down slightly on the year. While fixed asset investments increased considerably in the first half year, up by 12.4%, the investment grants in the same period decreased due to a special factor: the compensation payments from the Federation to the Länder (so-called Entflechtungsmittel or “unbundling funds”), among other things for social housing, have been discontinued due to a reorganisation of financial relations between the government and the Länder that took effect at the start of 2020. Instead of receiving compensation payments, the Länder now receive a higher share of VAT revenue. Spending on construction projects and on the acquisition of movable assets was up on the year, with increases of 14% (approximately €0.4bn) and 13.7% (approximately €0.1bn) respectively in the January–June period.

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Fiscal balance

The federal budget recorded a deficit of €50.9bn in the first half of 2020.

Revenue and expenditure are subject to strong fluctuations over the course of the fiscal year and thus have an uneven effect on cash funds in individual months. Net borrowing also tends to fluctuate considerably over the course of the year. This means that the fiscal balance at any given point in the year and the corresponding net borrowing figures are not reliable indicators of the end-of-year figures for the fiscal balance and net borrowing. This is especially the case in the current circumstances.

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Tax revenue in June 2020

Total tax revenue (excluding local authority taxes) in June 2020 fell by 19.0 % on the year. The economic effects of the coronavirus pandemic, combined with the tax measures adopted to combat the crisis, continued to have a significant negative impact on tax revenue. The yield from all joint taxes dropped substantially in the first half of 2020. Receipts from joint taxes declined by 20.6% in total. Tax revenues dropped significantly as a result not only of the revenue shortfall caused by the coronavirus pandemic, but also as a result of the tax measures introduced to mitigate the effects of the crisis. The objective of these measures is above all to quickly provide liquidity for taxpayers affected by the crisis. This was achieved above all by making it easier for taxpayers to avail themselves of options that already exist under German tax law. These include reductions in prepayments of income tax and corporation tax, the granting of deferrals, as well as the waiving of enforcement measures. In the case of value added tax (VAT), taxpayers with permanent VAT-return filing extensions (Dauerfristverlängerung) now have the option of a reduction in special prepayments. Since 24 April, taxpayers can also apply for a flat-rate reduction of prepayments already made for income tax and corporation tax for 2019 if, due to the crisis, they are expecting losses that can be carried back in the 2020 assessment period. For federal taxes too, appropriate measures were taken to provide companies with liquidity. This, combined with the economic impact of the pandemic, also resulted in a sharp decline in revenue of 13.9% in June. Receipts from taxes accruing solely to the Länder, on the other hand, rose by 16.5%.

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EU own resources

Transfers of own resources to the EU, including customs duties, totalled approximately €0.6bn in June 2020, a year-on-year drop of 77.8%. In June, the Commission drew down a significantly lower amount of VAT-based and GNI-based own resources compared with June 2019. This is in the context of the annually required settlement of balances in June of each year. Here the settlement of balances for the years 2001 to 2018 led to a positive outcome for the Federation and consequently low transfers of own resources to the EU. Furthermore, monthly fluctuations occur over the course of the year based on the EU’s financing needs at any given time. However, monthly requisitions are generally in line with the financial framework for the current year 2020.

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Cumulative overview of the January–June 2020 period

In the first half of 2020, total tax receipts decreased by 9.1% on the year. Revenue from the joint taxes declined by approximately 10.6% and revenue from federal taxes declined by approximately 5.0%. Revenue from taxes accruing solely to the Länder posted an increase of 8.8%.

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Distribution among the Federation, Länder and local authorities

The Federation’s tax receipts (after accounting for supplementary federal grants to the Länder) declined significantly on the year in June 2020, dropping by 18.7%. Revenue from joint taxes as well as federal taxes decreased significantly. In addition, supplementary federal grants to the Länder were markedly higher. In contrast, own resources payments to the EU were significantly lower on the year in June 2020.

Länder tax receipts were down by 16.5% on the year in June. This was due to a 20.3% year-on-year decline in the yield from the share of joint taxes allocated to the Länder. Higher receipts from taxes accruing solely to the Länder, which were up by 16.5%, as well as the increase in supplementary federal grants, were able to offset the losses slightly. The local authorities’ take from joint taxes fell by 9.5% on the year.

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Joint taxes

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Wages tax

Wages tax receipts declined in June 2020, with gross revenue decreasing by 5.4% in June on the year. Following the start of the coronavirus pandemic, many companies took advantage of the short-time working scheme. This significantly reduced the number of gross wages and salaries subject to the deduction of wages tax. Child benefit payments, which are financed from wages tax receipts, rose by 5.3% on the year due to a €10 per child increase in monthly child benefit that came into effect in July 2019. On balance, cash receipts from wages tax declined by 7.3% on the year in June 2020. In the first half of 2020, cash receipts from wages tax were down by 1.1% compared with the same period last year.

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Corporation tax

In June, which is an important month for prepayments, gross revenue from corporation tax declined by 38.1% on the year. The effect of the coronavirus on the economy, combined with the package of tax measures to combat the impact of the coronavirus, resulted in a significant decline in prepayments. The deferral of back payments of taxes determined at the time of assessment resulted in a further decrease in receipts. Taxpayer paybacks of investment allowance only very slightly exceeded payouts in June, which hardly affected the overall result, so that cash receipts from corporation tax also declined by approximately 38.1%. In cumulative terms, cash receipts from corporation tax fell by 37.2% on the year in the first half of 2020.

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Assessed income tax

Gross receipts from assessed income tax posted a year-on-year decline of 13.9% in the important prepayment month of June. As with the corporation tax, the reduction in prepayments as well as deferrals due to the coronavirus crisis resulted in a significant decline in revenue.

Employee refunds were down by 19.4% on the year in June; after these are subtracted from the gross figure (along with investment allowance payments and owner-occupied homes premiums, which are insignificant in terms of amount), net cash receipts from assessed income tax decreased by 13.4% in June 2020 compared to the same period in 2019. In cumulative terms, cash receipts from assessed income tax were down by 12.5% on the year in the January–June period.

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Non-assessed taxes on earnings

June 2020 saw a 61.8% year-on-year drop in gross receipts from non-assessed taxes on earnings. Due to restrictions caused by the coronavirus pandemic, many shareholders’ meetings at which dividend payouts for 2019 would have been decided, have been postponed. As in April and May, in June this also resulted in a significant drop in receipts from non-assessed taxes on earnings. This drop will be partially compensated for over the rest of the year by correspondingly higher receipts. However, the current economic situation will undoubtedly mean that some companies have to reduce this year’s dividend payouts, so that overall, a drop in revenue compared to last year is to be expected. Refunds by the Federal Central Tax Office, which are financed from this revenue, totalled about €124m. As a result, cash receipts from non-assessed taxes on earnings were down by 63.2% on the year. In the first half of 2020, cumulative cash receipts from non-assessed taxes on earnings were down by 30.3% compared with the same period in 2019.

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Final withholding tax on interest and capital gains

Revenue from final withholding tax on interest and capital gains fell slightly by 2.9% on the year in June 2020. Due to the increase in revenue over the course of the year to date, the cash receipts from withholding tax on interest and capital gains were up by 35.7% on the year in the first half of 2020.

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Value added taxes (VAT)

Receipts from VAT declined by 17.9% on the year in June 2020. Receipts from domestic VAT recorded a substantial year-on-year drop of 17.0%, while import VAT revenue fell by 20.7% on the year. Besides the declines in turnover caused by the lockdown, the deferrals that were granted as part of the package of tax measures also reduced revenue this month. Cumulative cash receipts from value added taxes recorded a year-on-year drop of 12.7% in the first half of 2020.

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Taxes accruing to the Federation

In June 2020, revenue from taxes accruing solely to the Federation was 13.9% lower than in the same month last year. In the case of some taxes, the tax measures that were introduced to improve the liquidity of companies resulted in a significant decline in revenue. However, in the case of energy duty, reduced consumption of fuel and electricity as a result of the crisis was also responsible for the sharp decline (-25.8%) in receipts. Revenue also dropped for coffee duty (-14.8%) and alcohol duty (-12.0%). Global air traffic has ground to an almost complete halt as a result of the lockdown. This, in combination with the granted tax deferrals, led to a 98.5% collapse in aviation tax revenue. Receipts from the solidarity surcharge declined by 19.1% as a result of drops in revenues from income and corporation tax (which constitute its tax base). The noticeable increase in revenue from tobacco duty (+22.3%) is attributable in part to an increase in purchases of excise stamps for tobacco products, but also to a shift in insurance tax for technical reasons, because part of the tax revenue from May was posted in June 2020. Further slight revenue increases were recorded for insurance tax (up by +0.1%) and motor vehicle tax (up by +2.1%). Trends in revenue from other taxes had only a minor impact on the overall results for federal taxes.

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Taxes accruing to the Länder

Revenue from taxes accruing solely to the Länder increased in June 2020 by 16.5% on the year. This was driven by a surge in revenue from inheritance tax, which was up by +44.7%. Receipts from property transfer tax and fire protection tax increased by 9% and 10.4% respectively. Yields from the betting and lottery tax increased slightly by 0.1% on the year. As a result of tax deferrals, receipts from beer tax fell by 45.9% on the year.

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Borrowing and guarantees

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