November 15, 2017 / 9:47 AM / 5 days ago

Fitch: Higher Tax Growth Helps Laender Budget Consolidation

(The following statement was released by the rating agency) LONDON, November 15 (Fitch) Higher tax revenue forecasts will improve German states' budgetary performance and their prospects of complying with the country's legal debt brake, Fitch Ratings says. This may require further efforts to limit spending growth, but we think most German states (or Laender) are in a strong position to comply with the debt brake when it takes effect in 2020. The most recent estimate from Germany's Finance Ministry on 9 November forecasts Laender tax revenues to total EUR298.1 billion in 2017. This is EUR3.3 billion above the previous estimate in May and would represent a 3.3% increase in Laender tax revenue from 2016. The revised estimate stems from upward revisions to forecasts for tax revenue at all German government levels, in turn driven by strong economic growth (German GDP rose 0.8% qoq in 3Q17, the Federal Statistics Office said on Tuesday). Strong tax revenues and fiscal consolidation measures have steadily improved the Laender's fiscal performance. Preliminary figures for 3Q17 show that 15 of the 16 Laender achieved net funding surpluses (only North Rhine-Westphalia did not) and that they posted a strong aggregate surplus of EUR12.7 billion, compared with EUR3.6 billion in 3Q16. This solid revenue trend along with cost consolidation measures ahead of the debt brake introduction are positive for the Laender's credit profiles, as are declining interest expenses. Low interest rates have enabled the Laender to reduce their interest costs as they refinance debt (refinancing needs are high, with10%-20% of total Laender debt outstanding typically coming due each year). Despite increasing debt, the Laender managed to lower their aggregated interest expenses by nearly one-third, to EUR13.3 billion in 2016 from EUR18.7 billion in 2012, and we expect this trend to continue in 2018, as refinancing continues. Only North Rhine-Westphalia currently reports a deficit before debt expenses, meaning that 15 Laender are compliant with the debt brake rule, which will require them to implement their budgets without taking on new debt from 2020. Continuing to comply with the debt brake will depend not only on revenues, but also on fiscal policy decisions, and in particular whether the Laender use the current period of economic growth and correspondingly strong tax revenues to build reserves and actively reduce debt. Tax revenues are forecast to increase at annual rates of between 2.9% and 5.1% in 2017-2022, which is likely to exceed spending growth. But control over expenditure will remain a key aspect of future compliance with the debt brake, given a backlog of investment needs that we assume will create rising capex requirements. This could put pressure on Laender budgets, as could an unexpected slowdown in revenue growth and rising interest rates. On 2 November, we affirmed the 'AAA'/Stable ratings of the 11 Fitch-rated Laender. The ratings are driven by the strong institutional framework under which the Laender operate. The solidarity system is enshrined in the German constitution and makes all Laender jointly responsible for supporting a state in financial distress. Federal financial support is also available. This means our Laender ratings are equalised with those of the Federal Republic of Germany. Details are available at www.fitchratings.com. <a href="https://www.fitchratings.com/site/re/10001578">German Laender Dashboard August 2017 Contact: Guido Bach Senior Director International Public Finance +49 69 768076 111 Fitch Deutschland GmbH Taunusanlage 17 D-60325 Frankfurt am Main Mark Brown Senior Director Fitch Wire +44 20 3530 1588 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com; Adrian Simpson, London, Tel: +44 203 530 1010, Email: adrian.simpson@fitchratings.com. The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings. ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. 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