Federal budget trends in January 2023

Revenue

Federal revenue in January 2023 totalled approximately €24.3bn, up by 6.4% (about €1.5bn) on the year. Tax receipts increased by 6.4% (roughly €1.4bn) year-on-year. For further information about tax revenues, please refer to the article “Tax revenues in January 2023” [in German only] in the current issue of the monthly report.

The category of “other income” recorded a year-on-year gain of 6.1% (about €0.1bn) in January 2023.

Expenditure

Federal expenditure in January 2023 totalled approximately €52.5bn, up by 15.6% (about €7.1bn) on the year. A breakdown by economic category shows that the rise in expenditure was driven mainly by investment spending, which was 198.2% (about €6.6bn) higher than in January 2022. This enormous increase is mainly due to a special factor: a €6.3bn loan that was granted to the IMF’s Resilience and Sustainability Trust in January 2023 was recorded as an investment item, as required under budget law. After adjusting for this effect, investment spending was up by €0.3bn, or 7.8%. Fixed asset investment was about 7.3% higher than in the same month last year.

Consumption spending remained roughly at the same level as last year, increasingly by only 1.3% (€0.5bn). There were several contrasting trends overall. Operating expenditure rose significantly (by 37.9% or about €0.7bn). As a result of the general increase in interest rates, interest expenditure also saw a substantial increase (of 47.8% or about €1.6bn). By contrast, ongoing grants and subsidies declined by 6.3%, or about €2bn, mainly due to the fact that fewer financial resources had to be made available for combating and mitigating the negative impact of the COVID-19 pandemic. For example, federal payments to the health fund to cover pandemic-related costs declined by about €2.6bn, to €0.3bn. In January 2023, there were no pandemic-related compensation payments under section 21 of the Hospital Financing Act (Krankenhausfinanzierungsgesetz), which totalled €1.4bn in January 2022. Pandemic-related assistance for businesses stood at approximately €60m, down by about €0.4bn.

Fiscal balance

The federal budget recorded a deficit of about €28.2bn in January 2023.

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.

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Tax revenue in January 2023

Total tax revenue (excluding local authority taxes) was up by 0.8% on the year in January 2023, thanks to a 2.1% increase in revenue from joint taxes. Receipts from the two taxes that generate the most revenue – wages tax and value added taxes – recorded substantial gains. However, there were declines in revenue from the remaining joint taxes, most significantly corporation tax, non-assessed taxes on earnings and final withholding tax on interest and capital gains. Revenue from taxes accruing solely to the Federation fell by 3.8%, with energy duty, tobacco duty and electricity duty all recording appreciable declines. Revenue from taxes accruing to the Länder was down by 19.2% on the year, primarily due to downwards trends in receipts from real property transfer tax and inheritance tax, the two highest-yielding Länder taxes.

EU own resources

Transfers of own resources to the EU, including customs duties, were 31.9% lower in January 2023 than in the same month of 2022. In general, monthly requisitions are based on the annual EU budget that is in force for the respective year and are distributed relatively evenly across individual months. However, there can sometimes be substantial year-on-year fluctuations in individual months.

Distribution among the Federation, Länder and local authorities

The Federation’s tax receipts (after accounting for supplementary federal grants that, under the fiscal equalisation system, are paid from the Federation’s revenues to Länder with below-average capacity) recorded a year-on-year rise of 7.3% in January 2023. The Federation’s take from joint taxes grew by 3.2%. This was higher than the increase in overall revenue from joint taxes, which amounted to 2.1%. The discrepancy is due to the fact that the Federation’s receipts from its share of VAT revenue increased by 7.9%, even though overall VAT revenue posted a smaller increase of 5.5%.

Under section 1 (1) of the Fiscal Equalisation Act (Finanzausgleichsgesetz), the Federation receives 52.81% of overall VAT revenue. This share is subsequently reduced by annual fixed amounts that the Federation allocates to the Länder and local authorities under vertical financial equalisation arrangements. The disproportionate increase in the Federation’s take from its share of VAT revenue in January 2023 can be attributed to the effects of these fixed amounts:

• Because the fixed amounts were approximately €0.2bn lower than in January 2022, the Federation’s overall receipts from VAT increased substantially. In 2022, the Länder received additional funds under the Act to Improve Quality and Participation in Child Daycare (KiTa-Qualitäts- und -Teilhabeverbesserungsgesetz) as well as a post-pandemic catch-up programme for children and young people for 2021 and 2022.
• It should be noted that even when the fixed amounts remain unchanged, the Federation’s VAT receipts rise when VAT revenue increases, since the volumes of the fixed amounts are not linked to revenue trends.

Other trends in January 2023: Revenue from taxes accruing solely to the Federation was down by 3.8% on the year. Supplementary federal grants to the Länder increased by 11.5%. Federal subsidies to the Länder for public transport were slightly down on the year. Federal transfers of own resources to the EU were lower than in 2022 (see above).

Länder tax receipts posted a small year-on-year decline of 0.8% in January 2023. Due to the mechanism for distributing VAT revenue described above, the Länder posted lower rates of growth for VAT revenue (up by 3.1%) and revenue from joint taxes (up by 0.8%) than the Federation. In addition, the yield from taxes that accrue exclusively to the Länder posted a significant decline of 19.2%. Länder receipts from federal subsidies for public transport were down by 3.8% on the year. However, the Länder saw an increase in receipts from supplementary federal grants (up by 11.5%).

Local authorities’ take from their share of joint taxes was 3.3% higher than in the same period last year, while their receipts from value added taxes were up by 3.8% on the year.

Joint taxes

Wages tax

Gross revenue from wages tax was up by 6.0% on the year in January 2023. Among other things, this reflects the labour market’s continued robust performance in December 2022, despite the overall economic burdens (see the article on economic trends [in German only] in the current issue of the monthly report). Child benefit payments – which are financed from wages tax receipts – rose by 15.3% on the year in January, primarily due to the increase in child benefit that came into effect on 1 January 2023. On balance, cash receipts from wages tax were up by 4.2% on the year.

Corporation tax

Gross corporation tax receipts in January are strongly influenced by the revenue administration’s assessment activities and were down sharply on the year by 41.2%. Research and investment allowance payments, which are financed from corporation tax receipts, totalled about €24.4m and thus had only a marginal impact on the yield from corporation tax. Cash receipts from corporation tax were down by 42.8% on the year in January 2023.

Assessed income tax

Gross revenue from assessed income tax recorded a year-on-year increase of 7.7% in January 2023. Employee refunds (which are subtracted from the gross figure) were up by 43.9% on the year. As with corporation tax, trends in gross tax revenue from assessed income tax and employee refunds are driven by assessment activities. Investment allowance payments, research allowance payments and owner-occupied homes premiums, which are insignificant in terms of amount, are also subtracted from the gross figure. On balance, cash receipts from assessed income tax were down by 1.1% on the year in January 2023.

Non-assessed taxes on earnings

Gross receipts from non-assessed taxes on earnings were 15.8% lower than in January last year. Refunds by the Federal Central Tax Office, which are financed from gross revenue, totalled about €7m (down by 47.2% on the year). Overall, cash receipts from non-assessed taxes on earnings fell by 15.6% on the year in January.

Final withholding tax on interest and capital gains

In January 2023, revenue from final withholding tax on interest and capital gains was 13.2% lower than in the same month last year.

Value added taxes

Revenue from value added taxes was up by 5.5% on the year in January 2023. Receipts from (domestic) VAT recorded a slight increase of 0.3%, while receipts from import VAT rose by 19.5% in year-on-year terms. Revenue from import VAT saw a marked increase, in line with the considerable year-on-year rise in the value of imported goods. Because import VAT can be deducted as input tax from (domestic) VAT, rising import VAT receipts tend to result in weaker revenue trends for (domestic) VAT. In addition, the reduction in the VAT rate on gas and district heating (from 1 October 2022 until 31 March 2024) is likely to have had a noticeable dampening effect on receipts from (domestic) VAT.

Taxes accruing to the Federation

In January 2023, revenue from taxes accruing solely to the Federation was down by 3.8% compared with the same month last year. Energy duty receipts recorded a sharp year-on-year decline of 27.5%, while revenue from tobacco duty fell by 14.4% on the year. Receipts from the solidarity surcharge rose by 1.8% on the year, thanks to growth in revenue from the taxes that make up its tax base. Revenue gains were also posted for insurance tax (up by 1.4%) and aviation tax (up by 51.2% – this surge can be attributed to the low 2021 baseline, which was still affected by the pandemic). Year-on-year revenue declines were recorded for motor vehicle tax (down by 1.2%), electricity duty (down by 2.7%), alcohol duty (down by 7.2%) and coffee duty (down by 5.1%). Trends in revenue from other taxes had only a minor impact on overall receipts from federal taxes.

Taxes accruing to the Länder

Receipts from taxes accruing solely to the Länder were down by 19.2% on the year in January 2023, mainly as a result of declines in revenues from real property transfer tax (down by 24.1%) and inheritance tax (down by 15.2%). In the case of real property transfer tax, the negative revenue trend probably reflects the weakening of the real estate market as a result of the sharp rise in construction prices and less favourable financing conditions. Year-on-year revenue declines were recorded for betting and lottery tax (down by 8.1%) and beer duty (down by 4.7%), while receipts from fire protection tax were 2.7% higher than in the same month of 2022.

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Borrowing and guarantees

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