Fitch: Higher Tax Estimates to Help Laender Meet Debt Brake Rule

(The following statement was released by the rating agency) LONDON, May 13 (Fitch) Higher tax revenue forecasts improve German Laender's prospects of complying with the debt brake starting in 2020, Fitch Ratings says. We think most states of Germany, known as Laender, are in a strong position to comply, although this may require further efforts to limit spending growth. The most recent estimate from Germany's Finance Ministry, published on 7 May, forecasts Laender tax revenues at EUR262.6bn in 2015, which is EUR2.9bn above the previous estimate last November. That would represent a 3.3% increase in Laender tax revenue from 2014. Bigger growth in Laender tax revenue reflects upward revisions to forecasts for tax revenue at all levels of German government. Fitch-rated Laender have already announced fiscal consolidation measures, largely focussing on restricting current expenditure growth, in anticipation of the debt brake. Based on these measures, revenue growth should exceed spending growth, reducing remaining deficits. The higher estimated tax proceeds will give additional support to this process (more than 70% of the Laender revenues were from taxation in 2014). Preliminary figures for 2014 show that nine of the sixteen Laender achieved net funding surpluses, and that they posted an aggregate surplus of just over EUR700m. Considering the last five years compound annual growth rate of Laender expenditures, and using the new tax estimate, we expect more states will report surpluses in 2015. These revenue and spending trends are positive for the Laender's credit profiles. The small 2014 surplus follows consecutive annual falls in the net funding deficit from its peak of EUR27.7bn in 2009. All states have followed the trend, although some still have sufficiently large deficits to make compliance with the debt brake, which will require the Laender to implement their budgets without taking on new debt, challenging. Individual progress will depend not only on revenue growth but also on fiscal policy. The debt brake prevents debt funding being used for capex, so some states may use the additional financial leeway provided by higher tax revenues for investment before its introduction (when such investment will have to come from current balance surpluses). This could slow the process of fiscal consolidation. On Friday, we affirmed the 'AAA'/Stable ratings of the seven Fitch-rated Laender. The ratings are driven by the strong institutional framework under which the German Laender operate. Details are available at www.fitchratings.com.">www.fitchratings.com. 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: Christian Giesen, Frankfurt am Main, Tel: +49 69 768076 232, Email: christian.giesen@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.">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: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.