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Impact of the fiscal equalization system on the fusion of two German federal states

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  • Thiess Büttner
  • Sebastian Hauptmeier

Abstract

A fusion of Schleswig-Holstein with the City-State of Hamburg would mean revenue losses for both states totalling €1.06 billion or 7.5% of the states' budget. This would result from the distribution effects in the present fiscal equalisation system. The system itself would experience long-term savings of 4% of the total budget. The current system subsidises structures that are harmful to German federalism. A fusion would not only save money but would provide a better structure in spatial-economic terms since policies could be better harmonised between Hamburg and Schleswig-Holstein. Here, the advantages are difficult to quantify, however. A fusion of smaller federal states would also have positive effects for federalism as a whole since the voting problems in the Bundesrat would be reduced and special regulations in the fiscal equalization scheme could be eliminated. It thus paradoxical that the existing fiscal federal system punishes the states that could merge instead of encouraging such alliances.

Suggested Citation

  • Thiess Büttner & Sebastian Hauptmeier, 2006. "Impact of the fiscal equalization system on the fusion of two German federal states," ifo Schnelldienst, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 59(10), pages 17-22, May.
    • Handle: RePEc:ces:ifosdt:v:59:y:2006:i:10:p:17-22
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    References listed on IDEAS

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    1. Homburg, Stefan, 1997. "Ursachen und Wirkungen eines zwischenstaatlichen Finanzausgleichs," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, pages 61-95.
    2. Frey, Bruno S. & Eichenberger, Reiner, 1996. "FOCJ: Competitive governments for Europe," International Review of Law and Economics, Elsevier, vol. 16(3), pages 315-327, September.
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    Cited by:

    1. Blesse, Sebastian & Heinemann, Friedrich, 2020. "Citizens’ trade-offs in state merger decisions: Evidence from a randomized survey experiment," Journal of Economic Behavior & Organization, Elsevier, vol. 180(C), pages 438-471.
    2. Kellermann, Kersten, 2007. "Kosten der Kleinheit und die Föderalismusdebatte in der Schweiz," KOFL Working Papers 3, Konjunkturforschungsstelle Liechtenstein (KOFL), Vaduz.
    3. Thiess Büttner & Petra Enß & Fédéric Holm-Hadulla & Robert Schwager & Christiane Starbatty & Wiebke Webering, 2010. "Der kommunale Finanzausgleich in Mecklenburg-Vorpommern : langfristige Entwicklung und Reformperspektiven ; Teil I: Der vertikale Finanzausgleich ; Gutachten im Auftrag des Innenministeriums des Lande," ifo Forschungsberichte, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, number 45.
    4. Jonathan Old & Felix Rösel, 2018. "Sparprojekt oder Milchmädchenrechnung? Die finanziellen Effekte eines Bundeslandes„Mitteldeutschland“," ifo Dresden berichtet, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 25(02), pages 12-17, April.
    5. Kersten Kellermann, 2008. "„Kosten der Kleinheit” und die Föderalismusdebatte in der Schweiz," Perspektiven der Wirtschaftspolitik, Verein für Socialpolitik, vol. 9(2), pages 196-225, May.

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    JEL classification:

    • H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism

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