Institute for Research in Economic and Fiscal issues

IREF Europe - Institute for Research in Economic and Fiscal issues

Fiscal competition
and economic freedom

Financial Federalism in Germany: Cooperation or Competition?

Abstract: In this article, German federalism is analyzed through its implications for public spending and for public revenue. The structure of government spending and taxation has evolved in the direction of greater centralisation. This tendency reveals itself (1) in the constitutional changes with regard to taxation, (2) the major territorial reforms and (3) in the increased influence of the federal state on the public spending of inferior levels of government. The evening out between authorities is too egalitarian and the effects on economic development are nefarious.

In contrast to a unitary system with a powerful central government, this cooperative federation suffers from a drawback, namely, that the federal state can often not make decisions without the agreement of member states. The consequence is that some reforms are hindered. It is in this way that the need of a fiscal competition between member states in order to better economic policy in Germany makes it felt.

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