Federal budget trends up to and including September 2020

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Revenue

Federal revenue for the period from January to September 2020 totalled approximately €223.3bn, down by 12.7% (approximately €32.4bn) on the year. This decline is due primarily to the effects of the Covid-19 pandemic and the associated tax-related assistance measures that have been adopted to help manage the crisis. Tax receipts (including transfers of own resources to the EU) declined by 13.6% (roughly €31.9bn) compared with the first nine months of 2019. Receipts from value added taxes as well as from income and corporation tax have been particularly affected, falling by €15.8bn and €12.4bn, respectively.

The category of “other revenue” was down by 2.4% (roughly €0.5bn) on the year in the January–September period. This can be attributed to lower revenue from business activities as well as from claims arising from guarantees.

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Expenditure

By adopting two supplementary budgets, the German government has taken decisive action in response to the challenges posed by the coronavirus pandemic both to health and to the economy. The additional expenditure contained in these two supplementary budgets now strongly influences the structure of federal spending. Expenditure in the first nine months of 2020 totalled €295.8bn, up by 15.4% (about €39.4bn) over the same period last year. A breakdown by economic category shows that the increase in spending during the January–September period was due mainly to growth in consumption spending, which was up by 15.5% (approximately €36.4bn) on the year. Ongoing subsidies to companies made up most of the increase. By the end of September 2020, approximately €14.5bn in immediate assistance for small companies and self-employed individuals affected by the fallout from the Covid-19 pandemic had been disbursed, out of the €18.0bn earmarked for this purpose in the second supplementary budget 2020. Approximately €4.9bn in additional funds for ongoing grants to social institutions to fight the coronavirus have been spent (2020 target: €9.1bn). In addition, ongoing grants to public administrations were significantly higher than in the same period of 2019. This category includes roughly €8.8bn in compensation payments under section 21 of the Hospital Financing Act (Krankenhausfinanzierungsgesetz), out of the €11.5bn earmarked for this purpose for 2020. Grants to social security funds were up by €8.4bn (8.4%) on the year. This includes disbursements to the health fund and the long-term care insurance compensation fund totalling €5.3bn, the entire amount earmarked for these funds. The increase in consumption spending was tempered by a decline in interest expenditure, which was down by 55.4% (about €6.8bn) on the year.

Investment spending totalled approximately €25.2bn in the January–September period, an increase of 13.6% (roughly €3.0bn) over the same period last year. This was mainly due to liquidity assistance (totalling roughly €3.9bn so far this year) provided to the Federal Employment Agency. Investment grants from January to September 2020 declined due to a special factor: the compensation payments from the Federation to the Länder, for social housing among other things, have been discontinued due to a reorganisation of financial relations between the federal 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. In the January–September 2020 period, spending on the acquisition of movable assets was up by 23.0%, (about €0.3bn) on the year. Spending on construction projects was slightly down on the year by 2.1%.

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Fiscal balance

The federal budget recorded a deficit of €72.5bn for the period from January to September 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 September 2020

Total tax revenue (excluding local authority taxes) in September 2020 was down by 12.8% compared with the same month last year. The economic effects of the coronavirus pandemic continued to have a negative impact on tax revenue. As in previous months, virus-related measures taken on the basis of secondary legislation have led to a significant decline in tax revenue. In September, incoming payments of previously deferred taxes exceeded the amount of newly granted deferrals, and this had a positive impact on revenue. At the same time, many taxpayers took advantage of the option to reduce their prepayments, and this led in turn to lower receipts from corporation tax and assessed income tax in September (a month when prepayments are due).

Furthermore, statutory measures to mitigate the effects of the coronavirus pandemic and to stimulate the economy also led to considerable revenue losses in September. Two measures adopted as part of the Second Coronavirus Tax Assistance Act (Zweites Corona-Steuerhilfegesetz) played a particularly important role in this respect: First, cuts in VAT rates have led to a decline in VAT receipts. This decline first showed up on government accounts in September. Second, the disbursement of initial €200 instalments of a one-time bonus for families with children – which is financed from wages tax receipts – contributed significantly to a large decline in wages tax revenue in September.

In September 2020, receipts from joint taxes were down by 15.2% on the year. Revenue from taxes accruing solely to the Federation declined by 3.1%. In contrast, revenue from taxes accruing solely to the Länder was up by 14.2% on the year due to a sharp increase in receipts from inheritance tax.

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EU own resources

Transfers of own resources to the EU, including customs duties, totalled approximately €2.2bn in September 2020, down from €2.6bn in September 2019 (a year-on-year decline of 17.9%). 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.

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Overview of the January–September 2020 period

In the nine months from January to September 2020, total tax receipts fell by 8.1% on the year. Revenue from joint taxes declined by 9.4%, and revenue from taxes accruing solely to the Federation was down by 4.2%. Revenue from taxes accruing solely to the Länder posted a gain of 7.4%.

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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) fell by 17.7% on the year in September 2020. The Federation’s take from joint taxes declined by 21.7%. An amendment of the Financial Equalisation Act (Finanzausgleichsgesetz) under the Second Coronavirus Tax Assistance Act reduced the Federation’s share of revenue from value added taxes and increased the shares of the Länder and local authorities accordingly. The purpose of this was to compensate the Länder for their lower tax revenue resulting from (a) the one-time bonus for families with children, which is financed from wages tax revenue, and (b) the temporary reduction in the VAT rate. The reduction in the VAT rate caused revenue from value added taxes to fall significantly overall in September. In the end, the Federation’s take from VAT revenue in September was down by 30.5% on the year. Receipts from taxes accruing solely to the Federation declined by 3.1%. However, supplementary federal grants to the Länder were down on the year, and own resources payments to the EU were significantly lower than in September 2019.

Länder tax receipts recorded a much less sharp decline of 7.7% on the year in September, due to the reallocation of VAT revenue described above. This led to a 3.4% increase in the VAT revenue taken in by the Länder. However, overall Länder receipts from joint taxes were down by 9.4% on the year in September due to the significant declines in revenue from all joint taxes except for final withholding tax on interest and capital gains. The yield from taxes accruing solely to the Länder was up markedly on the year, by 14.2%. The revenue from joint taxes allocated to local authorities was down by 10.6% on the year.

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Joint taxes

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Wages tax

Wages tax revenue posted a sharp decline in September. Gross wages tax revenue itself was down by only 2.8% on the year in September. This drop was largely due to companies’ ongoing use of Germany’s short-time work scheme, which significantly reduces the amount of gross wages and salaries subject to the deduction of wages tax. However, cash receipts from wages tax were down sharply by 23.9% on the year in September, a result driven mainly by the increase in child benefit, which is financed from wages tax revenue. Child benefit payments nearly doubled on the year in September (up by 94.6%) due to the disbursement of initial €200 instalments of a one-time bonus for families with children (the second instalment of €100 will be paid in October). In cumulative terms, cash receipts from wages tax were down by 4.7% on the year in the first nine months of 2020.

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Corporation tax

In September, which is an important month for prepayments, gross revenue from corporation tax declined by 25.6% on the year. The reductions in prepayments granted as part of the tax measures to mitigate the effects of the pandemic played a key role in driving this result. Due to their low volume, investment allowance payments had hardly any influence on receipts. Cash receipts from corporation tax were down by 25.2% on the year in September. On a cumulative basis, year-on-year cash receipts from corporation tax fell by 34.7% in the first nine months of 2020.

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Assessed income tax

September is also an important month for prepayments of assessed income tax. Overall, receipts from assessed income tax fell by 6.4% on the year in September. The reductions in prepayments granted as part of pandemic-related tax measures affected this negative outcome, but played less of a role than in the case of corporation tax. Employee refunds were down by 23.4% on the year in September; 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), cash receipts from assessed income tax fell by 5.0% compared with the same month last year. In cumulative terms, cash receipts from assessed income tax were down by 9.1% on the year in the January–September period.

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Non-assessed taxes on earnings

Gross receipts from non-assessed taxes on earnings were down by 6.3% on the year in September. The economic situation resulting from the coronavirus pandemic has led some companies to reduce this year’s dividend payments. As a result, overall revenue from non-assessed taxes on earnings in 2020 is expected to be lower than in 2019. Refunds by the Federal Central Tax Office, which are financed from this revenue, totalled about €107m. As a result, cash receipts from non-assessed taxes on earnings were down by 13.0% on the year in September. Cumulative cash receipts from non-assessed taxes on earnings fell by 18.5% on the year in the first nine months of 2020.

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Final withholding tax on interest and capital gains

Revenue from final withholding tax on interest and capital gains grew by 43.7% on the year in September 2020. So far this year, monthly revenue from this tax has fluctuated significantly, as economic trends have apparently led investors to realise gains from their investments in securities. Cumulative cash receipts from final withholding tax on interest and capital gains were up by 32.6% on the year in the January–September 2020 period.

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Value added taxes

Receipts from value added taxes fell by 12.8% on the year in September. Receipts from domestic VAT were down by 8.8% on the year, and import VAT receipts were down by 26.3%. September was the first month when the effects of the reduction in VAT rates (which took effect on 1 July 2020) showed up on government accounts. Companies are regularly granted permanent extensions for filing VAT returns and paying VAT. As a result, VAT revenue from July was not remitted by companies to the government until September. The resulting decline in revenue was only partially offset by the positive balance between (a) payments of deferred taxes that had become due and (b) newly granted deferrals. Cumulative cash receipts from value added taxes fell by 9.1% on the year in the January–September period.

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Taxes accruing to the Federation

In September 2020, revenue from taxes accruing solely to the Federation was down by 3.1% compared with 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 decline in revenue. In September, revenue gains were recorded for tobacco duty (up by 12.2%), insurance tax (up by 4.4%) and motor vehicle tax (up by 12.1%). In contrast, receipts from energy duty and electricity duty fell by 4.7% and 16.2%, respectively. Global air traffic came to an almost complete halt as a result of the shutdown. This, in combination with tax deferrals, caused aviation tax revenue to plummet by 79.7% on the year in September. The relaxation of measures to fight the pandemic in the summer only led to a slight recovery in revenue from this tax compared with previous months. Receipts from the solidarity surcharge declined by 8.2% due to the reduced revenue from income tax and corporation tax (which constitute its tax base). Trends in revenue from other taxes had only a minor impact on the overall receipts from federal taxes.

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Taxes accruing to the Länder

Receipts from taxes accruing solely to the Länder were up by 14.2% on the year in September 2020. This was driven primarily by a surge in revenue from inheritance tax, which was up by 53.3%. Revenue gains were also recorded for beer duty (up by 38.0%), betting and lottery tax (up by 8.5%) and fire protection tax (up by 4.7%). Real property transfer tax posted a slight decline of 2.3%.

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Borrowing and guarantees