Population Decline Creating Constant Pressure on Eastern German States and Municipalities on the Expenditure Side

Abstract

As the German constitution aims for equal living conditions, a huge number of political measures to enhance the conditions in the new states were undertaken after unification (known as the “Aufbau Ost”). In the new states, expenditure per capita rose significantly over the average expenditure of the old states and their municipalities and huge budget deficits occurred. Beginning in the mid-1990s, expenditure in the new states developed noticeably more reservedly than in the old states. Although the gradual consolidation of public finances has been made significantly more difficult due to the population decline, the majority of budgets in the new states have had budget surpluses for nearly 15 years now. Despite this, the demographic change will soon again pose problems for eastern German budgets. The foreseeable population development will create permanent pressure on public expenditure, which will be much higher in the new states than in the old states. As a result, the eastern states’ leeway in public budgets will be smaller compared to the western states’, posing the danger that investments will be neglected and that regional policy measures for an economic catch-up process will be neglected. Therefore, policymakers should consider integrating the shrinking and aging German population as a factor in the federal fiscal equalization system.