The federal government and the states appear to be close to agreeing upon a fundamental fiscal reform. According to the Handelsblatt, citing several individuals familiar with the talks, negotiations concerning the future distribution of financial burdens are progressing. A compromise is emerging that could potentially be decided upon during the meeting between Federal Chancellor Friedrich Merz (CDU) and the state premiers at the end of June.
For the past year, the federal government and the constituent states have been negotiating how they will split costs in the future, particularly regarding new social expenditures. A new principle is intended to be enshrined: whoever orders a service should pay for it (the “demand side pays” principle, or “Veranlassungskonexität”). While the CDU/CSU and the SPD had agreed to this in their coalition agreement, the different views of the federal government and the states on the precise implementation of this principle had made reform extremely difficult.
However, sources in the federal government and representatives from the states have uniformly stated that an understanding is now within reach. It is reported that the federal government is willing to implement the demand side pays principle, but only for laws that incur new expenses. The states had originally demanded that they and the municipalities be fundamentally compensated for reduced revenue resulting from tax laws. Furthermore, the federal government stands to benefit from the distribution of funds if its legislation ensures that the costs for services incurred by states and municipalities decrease.
