University of Regensburg
English translation of: Mark Spoerer, Öffentliche Finanzen, in: Thomas Rahlf (Ed.), Deutschland in Daten. Zeitreihen zur Historischen Statistik, Bonn: Bundeszentrale für politische Bildung 2015, pp. 102-113.
Mark Spoerer, Public Finances, in: www.deutschland-in-daten.de, 16.01.2017 < http://www.deutschland-in-daten.de/en/public-finances >.
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All figures and tables were taken from the German book edition. The Data from all tables including the English translations of all column titles can be downloaded at https://dx.doi.org/10.6084/m9.figshare.1450809.v1. A list of all english series names is also available in the documentation http://dx.doi.org/10.12759/hsr.trans.26.v01.2015, pages 1931-1988.
Public finances reflect the state’s evolving importance from the second half of the nineteenth century onwards. While military expenses diminished, societal and educational spending increased. The tax burden of private households rose correspondingly from ca. 5 per cent in the middle of the nineteenth century to over 20 per cent since the 1930s. Afterwards especially social welfare contributions have risen rapidly.
The term public finances includes all economic activities of the state’s central and regional authorities (Reich or Federation, states, municipalities and community organisations) as well as public enterprises having revenues and expenses. Citizens of a democracy delegate tasks to the state who has to finance (1) public expenditure which should be covered by (2) public revenues, particularly tax receipts. If this is not the case (3) public debt increases.
In the Middle Ages and in the Early Modern period, both the sovereign and the administration cared little about the separation of private, i.e. the sovereign’s, and public finances. Especially self-governed municipalities though, particularly free imperial cities, already had a regular budget which was not necessarily public, however.
The Nineteenth Century (1815-1918)
In the transition phase (“Sattelzeit”) around the time of the Napoleonic Wars, between the era of the Ancien Regime’s late absolutism and the establishing of the early constitutional states, many German states saw fundamental changes in their public finances. Resulting from the war, the remaining German states were not only highly in debt after the Congress of Vienna in 1815, but also had to integrate their newly acquired territories and standardise the overall administration which affected the public finances, of course. Most Rulers committed themselves to the newly established constitutions, which had disciplining effects on a budget that was now not only public, but demanded also decent planning, enforcement and supervision. “The budget is like the state’s carcass, stripped off of all embellishing ideology” Rudolf Goldscheid, one of the founders of financial sociology would state bluntly and sarcastically a hundred years later in 1926.
In the course of the nineteenth century, the state acquired further duties besides the three previous fields of expenditure, i.e. court, military and administration. Organization and expansion of the public education system was of crucial importance, as the massive population growth of the last quarter of the nineteenth century had led to enormous additional expenditures, especially on local or rather municipal levels. Meanwhile, setting up and managing public companies was significant, as their large structure organized as a network had decisive features of a natural monopoly; meaning that founding a competing company would have been economically inefficient. Hence, especially municipalities ran public utilities (water, gas, electricity) while the states managed the railways. The latter were very profitable in the beginning. The monopoly profits of the Prussian Public Railway massively exceeded all other tax incomes of the state so that even during the Weimar Republic, the railways’ profits (then the German National Railway) were used to cover a big part of the reparation payments. With health insurance (issued 1884), accident insurance (1885) and the pension scheme’s predecessor (1891), the Reich had to finance the national insurance’s three initial pillars from the 1880s onwards, which demanded considerable sums as start up financing.
True to Nicolas Canard’s slogan saying that every existent tax is good and every new tax is bad, there were only minor changes on the revenue side after the reforms around 1820. In spite of the income tax’ success in England (issued in 1842), the German states hesitated for a long time before using this tool forcefully. The German Reich’s constitution of 1871 stated customs revenues and several purchase taxes as the major sources of income. Switching from free trade policies to protectionism in 1879-80, the Reich’s sources of income acquired particular importance as they increased (especially from 1904 onwards) its budget significantly, enabling the administration to postpone the widely demanded finance reform. A complicated system balanced the budget by requiring the Reich to transfer surplus revenues to the states, while on the other hand it could demand so-called “Matrikularbeiträge” to cover its costs.
Contemporaries described the Reich as boarder to the states (“Kostgänger”), while today’s scholars find that such a system might have enabled the Reich to run over its budget regularly, in particular during the arms build-up before WWI (soft budget constraint).
The tax burden increased from 5 per cent to 10 per cent of the national wealth in the second half of the nineteenth century. In the beginning, the taxes differed significantly according to region, sector and social background. It shifted from a very unequal form of taxation, being a burden especially for the simple people in Prussia, to an increasingly fairer system towards WWI. Raising an income tax was decisive to insure more equal taxing (issued in Prussia within Miquel’s tax reform in the early 1890s), although it was denounced as “terrorist” by public finance economists in the beginning. It meant rich earnings for the states in the booming Empire without putting a strain on the less affluent taxpayers. Still, the public deficit was constantly on the rise on all levels (Reich, states, municipalities). Noteworthy in the international context is the significance of the municipalities contributing ca. 40 per cent of public revenues and public spending in 1913.
Naturally, WWI led to a massive increase in public spending for military and armament, while there where only moderate tax increases. In the beginning, the Reich financed the rapidly rising deficit through direct debiting, that is issuing war bonds to citizens. An indirect form of borrowing followed later: an ever increasing amount of freshly printed money faced an ever diminishing amount of consumer goods leading to heavy inflation during the war, but particularly in its aftermath. Progressing to hyperinflation in 1922/23, any state accountancy resulted in waste-paper. Hence, most records concerning (not only) public finances are fragmentary between 1914 and 1923; often for 1924 as well.
The Weimar Republic (1919-1932)
Before WWI, several minor and wealthy municipalities had lowered the income tax’s surcharge rates to attract wealthy taxpayers. This had led to increasing tax competition that ended only when the Reich’s minister of finance Matthias Erzberger issued a tax reform named after him in 1919-20. As the Reich had to pay its reparations, Erzberger centralised its budget for which the value added tax, introduced during WWI, was the most important income source. This reform set the basis for Germany’s current taxation system.
On the expenditure side, military spending decreased massively as the Treaty of Versailles forced the Reich to lower its expenses in this sector. The savings happened to be roughly of the magnitude of the reparations that the Reich had to collect and to transfer abroad. The social burden following the war and the welfare state’s expansion, particularly the introduction of the unemployment insurance as the fourth pillar of the social insurance (issued in 1928), strained the public finances significantly.
The domestic debt was completely paid by freshly printed money up to 1923, which equalled an enormous extraordinary tax or rather a partial expropriation of the population. As the Reich was not allowed to issue new debt according to the Dawes Plan of 1924, the lower local authorities, especially the municipalities, issued enormous debt in the second half of the 1920s. Contemporaries criticised in this respect that these financial means were not designed for investment as they tended to be before WWI, but rather for consumptive use, e.g. for building public parks and swimming pools.
As the German currency stabilised after 1923/ 24, the high interest rate policy of the Bank of Germany led to public and private borrowings abroad, which entailed a rapid increase of foreign indebtedness. The reparations were in effect financed via foreign debt, resulting in Germany’s fatal dependence on the United States’ economic activity. The global banking crisis starting in 1929 led to an unmanageable economic crisis in Germany from July 1931 onwards. With foreign capital fleeing the country, the Reich’s government now really had to pay the reparations by means of its domestic economic circuit, which had been the actual intention anyway. The international regulations concerning the reparations (Dawes-Pan 1924 and Young-Plan 1929-30) denied the Reich any kind of debt as well as any devaluation of the Reichsmark. On top, the prevailing economic orthodoxy demanded a balanced budget. Pursuing a pro-cyclical fiscal policy, Chancellor Brüning, incumbent from July 1930 until May 1932, increased taxes and decreased public spending, which had disastrous effects on the economic activity and led to high unemployment.
National Socialism (1933-1945)
The Introduction of tax vouchers, granted to those companies which paid their taxes on time, had come too late to boost the economic activity before Adolf Hitler came to power in late January 1933. The National Socialists continued pursuing these taxation policies and introduced an additional tax reform encouraging the companies to reinvest their newly made profits in the course of the rearmament policies instead of distributing it to their proprietors. Depriving the states and municipalities of their financial autonomy, they further pushed on with Erzberger’s policies to centralise all public finances.
Facing massively rising spending, taxes were raised only moderately during WWII just as it had been the case during WWI. In addition, the Reich did not issue war bonds, but financed the armament indirectly by the expansion of the money supply from the very beginning.
As consumers were not able to spend their money, they transferred it to saving accounts of financial institutions that hardly saw an alternative to lending it to the state (“silent war financing”). The rapidly rising public spending reflected the economy’s entire adjustment to the purpose of warfare. Furthermore, occupied territories contributed to finance the war in various ways (war contributions, unfavourable exchange rates etc.).
The Development since 1945
Analogically to the post WWI era, after 1945 a huge stock of Reichsmark coincided with a very low production of consumer goods. The resulting inflation was only visible on the black-market because of the administration’s pricing policies and ended in June 1948 with the introduction of the Deutsche Mark (DM). Like in 1923/24, the German state got rid of his domestic debt by means of this second large-scale expropriation, particularly on the backs of the middle and lower class.
The given financial statistics show its second bigger gap between 1939 and 1949, when the Federal Republic of Germany and the German Democratic Republic (GDR) were founded. The data for the GDR published here contain only very little data as a state-directed economy assigns a very different role to taxes compared to a capitalistic market economy which clearly distinguishes between private and public calculations. Hence the data published here illustrate the expenditures and revenues of the GDR only.
The Federal Republic of Germany resumed a tax policy similar to that during the Weimar Republic. It re-strengthened the financial autonomy of the states and the local authorities, but did not return to the far-flung local autonomy before WWI.
In the beginning, the tax policies encouraged the companies to take up investments, but in contrast to the ‘Third Reich’, without exerting much influence on the particular fields of expenditure. As it had been the case for Weimar, the share of public expenditure increased in the course of an expanding welfare state.
Especially linking the pensions to the wages just before the general elections in 1957 (pensions would rise in accordance with the actual wage level from now on) and the pension fund’s adjustment to the pay-as-you-go system proved to be very expensive (cf. the anthology’s article on welfare policy). In this respect, Conservative governments differed only little from Social-Democratic governments. Introducing the nursing insurance (in effect since 1996), the fifth and so far the last pillar of the social insurance has been introduced by Conservative Chancellor Helmut Kohl. Despite the 1956’s rearmament, military spending has never again reached pre-WWII’s share. Expanding the educational system, increasingly the tertiary education sector, constituted an ever growing share of public expenditure.
Concerning public revenues, the Federal Republic focused increasingly on indirect taxation. The turnover tax, introduced in 1918, was increased successively from 0.5 to 4 per cent in 1951. In the beginning it was a cumulative all-stage turnover tax, that is a repeated levying with every resale. With the tax rate on the rise, this increasingly supported the companies’ vertical integration. In the course of the EEC standardizing its VAT-system in 1968, the all-stage principle was replaced by a system in which the levied tax on a previous sale was deductible as a sort of pre-tax. Hence, the value-added is taxed only once on each level. The rate was still 10 per cent in 1968 (5 per cent particularly for foods) and has so far (January 2017) risen to 19 per cent (7 per cent for foods) since the latest increase in 2007.
In contrast to the VAT, the mineral oil tax (since 2006 energy tax) is a quantity tax. Introduced in 1930, its significance has risen steadily after WWII, now comprising the third largest income source after income tax and VAT. Converted into Euros, it was 0.07 cent a litre of petrol in 1951 and tripled in the 1970s. To finance the German Reunification, it escalated to a converted 0.42 € per litre in 1991. Today (January 2017) the rate is 0.65 € per litre of petrol, with the amount being liable also to VAT.
Indirect taxes tend to impact regressively, which means that they usually affect poorer households stronger than wealthy ones, as the latter can save a bigger amount of their income. That is why the Reich’s income tax has been equipped with progressive elements since 1920. The heated political discussions about the highest tax rate has always veiled the fact that the German income tax system is not very transparent due to its many tax-deductible expenses. The incomes’ actual liability of the income tax is decisively lower than the highest valid tax rate of 53 per cent (1953) or rather 45 per cent (2017).
The ratio of the tax revenues to the GDP (tax load ratio) has been remarkably stable since 1950. It has always been between 21 and 25 per cent. Social expenses have risen dramatically however.
The tax revenue’s tremendous absolute increase was not able to prevent a sharp rise of public debt. The years experiencing strong economic growth saw the disproportional growth of the public sector. The decline of economic growth in the middle of the 1970s, initially associated with the oil price crisis, and later with the economic and financial policies of Social Democratic governments on part of the Conservatives, also continued under Conservative governments. Slowing down public borrowing proved to be extremely difficult, not least for the very high share of personnel expenses in public expenditure. Nevertheless, it seemed to be accomplished by the end of the 1980s, when the new indebtedness quota (“Maastricht”) decreased to 1 to 2 per cent of GDP.
The GDR’s joining the Federal Republic (“Reunification”) required enormous investment and other expenditures, which could only be partly financed via tax increases – like the mineral oil tax increase and the introduction of an income tax surcharge in the West (“Solidarity Surcharge”) – so as not to stall economic activity. Increased consciousness of a demographic change and the seemingly endless rise of the unemployment rate until the early 2000s have been developments that led to a discussion about the welfare state which is still going on today.
- Marc Buggeln: Steuern nach dem Boom: die Öffentlichen Finanzen in den westlichen Industrienationen und ihre gesellschaftliche Verteilungswirkung, in: Archiv für Sozialgeschichte, 52 (2012), p. 47– 89.
- Marc Hansmann: Vor dem dritten Staatsbankrott? Der deutsche Schuldenstaat in historischer und internationaler Perspektive, München 2012.
- Eckart Schremmer: Steuern und Staatsfinanzen während der Industrialisierung Europas. England, Frankreich, Preußen und das Deutsche Reich 1800 bis 1914, Berlin 1994.
- Mark Spoerer: The Evolution of Public Finances in Nineteenth-Century Germany, in: José Luis Cardoso/Pedro Lains (Eds.): Paying for the Liberal State: The Rise of Public Finance in Nineteenth Century Europe, Cambridge 2010, p. 103 –131.
- Andreas Thier: Steuergesetzgebung und Verfassung in der konstitutionellen Monarchie. Staatssteuerreformen in Preußen 1871–1893, Frankfurt a. M. 1999.
- Hans-Peter Ullmann: Der deutsche Steuerstaat. Geschichte der öffentlichen Finanzen vom 18. Jahrhundert bis heute, München 2005.