The German Fiscal Equalisation System: Taking Account of Differences in Governmental Purchasing Powers

This paper looks at reform proposals for the fiscal transfer system in Germany to take account of differences in governmental purchasing powers across states, i.e. differences in governmental costs of public goods and services. Since data on differences in governmental purchasing power is missing for the states, differences in intergovernmental purchasing power are proxied by disparities in regional purchasing power in the private sector. Two different reform proposals for a modified transfer system are examined. The first one extends the current fiscal transfer system by additionally allowing for disparities in governmental purchasing powers across states; the second one completely abstracts from higher expenditure needs per capita for city states and links fiscal transfer payments entirely to disparities in governmental purchasing power across states. Simulating the modified fiscal transfer systems would yield a wide spectrum of financial consequences.