In times of low interest rates, the federal government made good money on government bonds. But now the situation is reversed and it becomes clear: a booking rule represents the budget in a severely distorted manner.
It took weeks for the federal government to scrape together the missing 17 billion euros in the 2024 federal budget – with the result that it is now the already heavily burdened consumers who have to pay. In 2024, heating, refueling and going to restaurants, among other things, will become more expensive for them.
A letter from the Federal Ministry of Finance now shows that the 17 billion could have been found differently. Namely, the federal government would have calculated differently for the 2023 supplementary budget. The focus is on the federal government’s interest expenses. In 2023, these were estimated at 36.83 billion euros. According to a query from left-wing MP Christian Görke, it could have only been 19.84 billion euros, i.e. 16.99 billion euros less – if the federal government had spread the interest expenses over several years. The fact that the difference corresponds almost exactly to the missing 17 billion euros may be a coincidence. However, it could also give the impression that the state is counting on itself to be poor.
As of now, the federal government includes its interest expenses in the budget all at once. Why? Unclear – and probably more of a habit than a best practice. Federal Chancellor Olaf Scholz also handled it this way during his time as Federal Finance Minister. Many other industrialized nations, however, spread their interest costs over the term.
Interest expenses arise, for example, when the federal government takes on new debt through federal bonds. The state pays interest on this. The federal bonds are issued on the stock exchange and are an important way for the Federal Republic to finance debts. Other countries also finance themselves through bonds. Investors buy the bonds and receive consistent annual interest from the government over their entire term. In Germany, bonds have a term of at least seven years.
Interest rate environment shapes the price
The bonds have a nominal value, usually exactly 100 euros. At the end of the term, states buy back the bonds at this nominal value. In the meantime, the prices of the bonds on the stock exchanges can fluctuate – for example to 95 euros or 105 euros. In the end, the issuer still gives the full 100 euros back. So if an investor buys a bond at a price of 95 euros, he will still receive 100 euros back at the end of the term. In the meantime, he also receives a pre-defined interest rate.
Whether a bond trades above or below its face value depends on the interest rate environment. In recent years, market interest rates have been extremely low, sometimes even negative. This has led to rising bond prices. A bond therefore cost more than the face value, for example 119 euros. The loss per bond was therefore 19 euros after the end of the term. Nevertheless, bonds were attractive to investors because the government offered a better interest rate than the free market. Investors therefore accepted the higher price and paid the premium, in this case 19 euros.
What’s more: the state was able to issue the bonds above the nominal value and thus even earned money on its debts. These surcharges are deducted from interest expenses. The higher these surcharges are, the lower the interest costs in the household. In this scenario, the previous booking rule worked particularly well. Because the more surcharges in a year, the lower interest costs – although the model is finite.
Booking principle distorts budget situation
In other countries, however, the premiums achieved are spread over the entire term of the bond. For example, if it runs for ten years, the surcharge paid is also distributed in the state budget over ten years, in equal parts. In the example above, that would be 1.90 euros for each year in which the bond runs. However, this principle is not applied in Germany.
In this country, the entire amount is recorded in the federal budget in the year in which the bond was issued. The 19 euro surcharge from the example would be booked all at once in just one year. In years with low market and high government interest rates, this is a big plus in the budget.
This accounting principle leads to the actual budget situation being distorted. Because what applies in one direction also applies in the other: if the market interest rate rises, bond prices fall. Since the ECB initiated the interest rate turnaround, there are no longer any surcharges for the state, but the state has to pay more itself. The market offers attractive alternatives through fixed-term deposits, shares or corporate bonds. States are considered solid, but not necessarily lucrative debtors. Government bond yields are now well below competing alternatives. In order for the state to find buyers for its new bonds, it often has to sell them for less than the nominal value of 100 percent.
For the federal budget, this means deductions, which – like the surcharges – are all booked in the same year. To be more precise, these amounts are added to the state’s interest expenses. Apart from surcharges and discounts, the state must continue to pay the interest that it has promised in recent years. Now that he doesn’t record any surcharges, but at the same time pays the high interest rates on bonds from previous years, more money has to be kept in the budget.
Economist sees rapid change as “critical”
The missing difference of around 17 billion euros appears again here. The ministry also calls this booking option “period-based”. This simply means that the premiums are spread evenly over the entire term of the bond. From an economic perspective, this means: At the moment we are looking at the deposits and payments into the federal treasury, but not at the actual income and expenditure.
Assuming the bonds run for ten years, then the 17 billion euros have to be divided by ten. Each year, 1.7 billion euros will then be recorded in the budget – so up to 15.3 billion euros (17 minus 1.7 billion euros) could be saved in the supplementary budget for 2023. Purely through accounting.
Economists are still skeptical. “Changing the system now would be a break with the previous booking logic,” says Tobias Hentze, an expert in public finance from the German Economic Institute (IW) in Cologne. “I’m critical of only doing this because the Federal Constitutional Court blew up the budget and we suddenly need money.” From an economic point of view, however, periodic accounting would be appropriate from Hentze’s point of view – as long as it is implemented systematically. “If you change the system, you have to allow it to go both ways. In recent years, the interest rates in the budget were artificially low, now the opposite is happening.”
The Deutsche Bundesbank also shows the possibility of distributing interest on an accrual basis in the future. This could be “implemented without major difficulties”, would be “more economically appropriate and would have a number of other advantages”, she wrote in 2021. In particular, it would make the actual budget situation easier to recognize: “The budget burden from interest would be perpetuated, the budget results would be easier to plan and less erratic .” The debt brake would also be better met. Because years with high surcharges provide relief for the budget, so that the debt brake would be “virtually undermined” and relaxed in the short term.
This has been the case in recent years because the size of the surcharges has increased significantly. In the decade up to 2010 they averaged 500 million euros, the Bundesbank calculates. In the last decade up to 2020 it was already 4 billion euros. A record high of almost 12 billion euros was reached in 2020. As a result, interest expenses in the household were reduced by almost two thirds.