Federal budget trends up to and including July 2023

Revenue

In the period from January to July 2023, federal revenue totalled €215.6bn, up by 6.0% (€12.3bn) on the year. Tax revenue totalled €199.6bn, a gain of 5.4% (€10.2bn) on the year. Further information on tax revenues is provided in the article “Tax revenues and economic environment in July 2023” (in German only) in the current edition of the monthly report.

The category of “other income” recorded an increase of 14.4% (€2.0bn) on the year in the first seven months of 2023. Within this category, revenue from fees and other income from guarantees rose by €0.8bn, and interest revenue from the Federation’s cash management system was up by €0.6bn. In addition, Germany received €0.6bn in disaster relief from the EU Solidarity Fund to help repair the damage caused by the severe floods in summer 2021.

Expenditure

In the period from January to July 2023, federal expenditure totalled €263.1bn, down by 2.3% (€6.1bn) on the year. Broken down by economic category, investment spending was up by 33.3% (€6.1bn), while consumption spending was down by 4.9% (€12.3bn) on the year.

As in previous months, the significant increase in investment spending is 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 remained roughly constant on the year (down slightly by 0.8%, or €0.2bn). There were several contrasting trends overall. On the one hand, liquidity assistance provided to the Federal Employment Agency declined by €2.7bn on the year in the first seven months of 2023, and this year’s loan to the Poverty Reduction and Growth Trust was €0.5bn less than in 2022. Fixed asset investment was also down slightly on the year, by €0.1bn. In contrast, spending on “investment grants to other areas” increased by €2.8bn on the year. These grants are distributed among a wide variety of federal budget items: key areas where expenditures increased included grants for the operation of storage and regasification facilities (up by €0.5bn), grants for investments in Autobahn des Bundes GmbH (up by €0.3bn) and grants to cover construction costs for maintaining the federal rail infrastructure (up by €0.3bn). In addition, grants to the Länder for the construction of social housing were up by €0.2bn on the year.

Consumption spending likewise showed contrasting trends. Due to the general increase in interest rates, interest expenditure rose sharply, by €14.0bn. In contrast, ongoing grants and subsidies contracted by 14.6% (€28.2bn) on the year, mainly because much less funding had to be made available to combat the adverse effects of the Covid-19 pandemic than in 2022. For example, federal payments to the health fund to cover pandemic-related costs totalled €1.3bn, a decline of €21.1bn. Pandemic-related assistance to businesses totalled €0.4bn, down by €7.5bn on the year. Pandemic-related compensation payments under section 21 of the Hospital Financing Act (Krankenhausfinanzierungsgesetz) amounted to only €2.5m in the first seven months of 2023, €4.1bn less than in the same period last year. Grants for the centralised procurement of vaccines to fight SARS-CoV-2 fell by €3.2bn on the year to €0.9bn. The decline in ongoing grants and subsidies was offset somewhat by a €2.5bn increase in spending on citizen’s benefit, a €1.2bn federal subsidy to the general pension insurance system and a €1.2bn supplementary federal subsidy to the health fund. In addition, expenditure to enhance security, defence and stability in partner countries rose by €2.2bn.

Fiscal balance

The federal budget recorded a deficit of €47.4bn for the January–July 2023 period.

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 July 2023

Tax revenue trends

Total tax revenue

Overall tax revenue (excluding local authority taxes) was up sharply by 15% on the year in July 2023 (see the table “2023 trends in tax revenue (excluding local authority taxes)”). This increase was driven primarily by revenue from joint taxes, which grew by nearly 18% on the year. However, this upward trend in receipts from joint taxes was largely the result of special factors. For example, the surge in wages tax revenue was attributable to relief measures contained in the 2022 Tax Relief Act (especially the retroactive increase in the basic personal allowance and the standard allowance for employees, along with payments of the 2022 child bonus) that were posted to government accounts in July 2022 and thereby lowered last year’s baseline figure. In addition, the deferred posting of receipts from the “One Stop Shop” (OSS) scheme caused a significant increase in domestic VAT revenue. Furthermore, revenue from non-assessed taxes on earnings posted a very strong year-on-year gain in July after falling sharply in June; this fluctuation is likely due to variations in the scheduling of major corporate shareholders’ meetings in 2022 and 2023.

Revenue from taxes accruing solely to the Federation posted a year-on-year gain of approximately 8%, driven largely by increases in revenue from tobacco duty, insurance tax and electricity duty. Receipts from taxes accruing solely to the Länder were down again on the year in July, but the rate of decline – about 8% – was not as high as in previous months. Revenue from real property transfer tax in July was roughly at the same level as in recent months, which means that the figures remain down sharply in year-on-year terms (by about 25% in July). Conversely, inheritance tax revenue posted a year-on-year increase of similar magnitude (fluctuations in inheritance tax receipts are common during the course of the year).

Apportionment of tax revenue among the different levels of government

The surge in receipts from joint taxes was mirrored in the sharp year-on-year growth in overall tax revenue recorded by the Federation and the Länder. The Federation’s overall tax receipts (after the apportionment of VAT revenue and the subtraction of supplementary federal grants) rose by nearly 22% on the year in July. Overall tax revenue for the Länder climbed by 12% on the year. The discrepancy in growth rates between the Federation and the Länder was due mainly to the year-on-year increase in receipts from purely federal taxes and the year-on-year decline in receipts from purely Länder taxes. Federal subsidies to the Länder for public transport were slightly higher on the year in July. Local authorities’ take from their share of joint taxes was up by just over 12% on the year.

Apportionment of VAT revenue in July 2023

In July 2023, revenue from value added taxes was distributed as follows among the Federation, Länder and local authorities:

Further details on specific taxes

Wages tax

Gross revenue from wages tax was up by just over 5½% on the year in July 2023. To some extent, this increase reflects the impact that the 2022 Tax Relief Act (Steuerentlastungsgesetz 2022) had on revenue figures for July 2022. That legislation provided for retroactive increases in the basic personal allowance and the standard allowance for employees, which were posted to government accounts in July 2022 and therefore sharply reduced last year’s baseline figure. At the same time, however, extensive tax relief measures in 2023 – especially the measures contained in the Inflation Reduction Act (Inflationsausgleichsgesetz) and the 2022 Annual Tax Act (Jahressteuergesetz 2022) continue to have a dampening effect on current wages tax receipts. Adjusting for these two opposing effects, gross wages tax revenue would have increased by an estimated 5% on the year in July 2023. Furthermore, in July 2022, both child benefit as well as the 2022 child bonus were financed from gross wages tax receipts, which further reduced net revenue. Due to the revenue effects of child bonus payments in July 2022, overall child benefit payments in July 2023 were down significantly on the year by 20%, despite the fact that benefit rates are higher this year. Adjusting for (a) the two opposing effects in connection with child benefit payments (i.e. the 2022 child bonus and the 2023 increase in benefit rates) and (b) the tax relief measures described above, cash receipts from wages tax would have increased by an estimated 5% on the year in July 2023 rather than the officially reported increase of just under 14%.

Wages tax revenue continues to be buoyed by employment levels, which – despite remaining basically unchanged in comparison with the previous month – were still up on the year in July, by about ¾%. In addition, nominal wages are likely to have posted robust growth, but because these higher wages include payments of the tax-exempt inflation compensation bonus, the impact on tax revenue will have been muted. Year-on-year rates of change in the number of employees doing short-time work appear to have flattened out, due to the sharp decline in short-time work in spring 2022. This means that short-time work is probably no longer having a noticeable effect on year-on-year changes in wages tax revenue.

Taxes on earnings

Receipts from assessed income tax and corporation tax in July 2023 were driven by revenue administration assessments for the year 2022. Gross corporation tax revenue totalled approximately −€250m in July. After accounting for research allowance and investment allowance, net corporation tax receipts totalled −€280m.

Gross revenue from assessed income tax totalled approximately €1.2bn in July. After subtracting (a) refunds to employees assessed for income tax and (b) relatively small amounts of research allowance, investment allowance and owner-occupied homes premium payments, cash receipts from assessed income tax totalled roughly −€180m.

In the case of non-assessed taxes on earnings, last month’s year-on-year decline of over 27% was more than offset by a nearly 55% year-on-year gain in July. June and July are two of the highest-revenue months for non-assessed taxes on earnings, and the large fluctuations in revenue here were likely driven in particular by scheduling variations in corporate shareholders’ meetings. Receipts from non-assessed taxes on earnings were up by just over 14% on the year in the first seven months of 2023. This figure backs up the expectations of the Working Party on Tax Revenue Estimates, which forecast roughly 13% growth in revenue from non-assessed taxes on earnings in 2023, among other things due to planned dividend distributions announced by major corporations.

Final withholding tax on interest and capital gains recorded even higher year-on-year revenue growth – 90% – in July, although the baseline figure from 2022 was relatively low. This tax can experience major fluctuations in revenue, because the receipts are derived mainly from the taxation of capital gains.

Value added taxes

Revenue from value added taxes surged by over 13% on the year in July 2023. Import VAT was down by roughly 14% on the year in line with the general downward trend in nominal imports of goods, which is partly due to price-related factors. Imports of goods were down by nearly 12% on the year in June 2023, and by just over 3% after adjusting for working days and seasonal factors.

In contrast, (domestic) VAT receipts posted a robust gain of over 23%. To a large extent, this was due to the deferred posting of about €2.8bn in receipts from the “One Stop Shop” (OSS) scheme. Adjusting for this effect, (domestic) VAT receipts would have been up on the year by about 9% and overall revenue from value added taxes by about 2%.

In cumulative terms, revenue from value added taxes was up by only about 1½% on the year in the first seven months of 2023, despite very high rates of inflation. Factors contributing to this subdued outcome included (a) a reduced yield resulting from the temporary VAT rate cut on gas and district heating and (b) the weak trend in real consumption so far this year. For example, nominal retail sales (the relevant figure in determining VAT revenue) were up by only about 3½% on the year in the first half of 2023; this meant an appreciable 4½% decline in real terms. 

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Borrowing and guarantees

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