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Action of CDS/CSU and FDP against Federal Budget 2004 unsuccessful

Press Release No. 77/2007 of 09 July 2007

Judgment of 09 July 2007
2 BvF 1/04

The application by 293 members of the Fifteenth German Bundestag (CDU/CSU and FDP parliamentary groups) for judicial review of the 2004 Federal Budget was unsuccessful. In its judgment of 9 July 2007, the Second Senate of the Federal Constitutional Court held that the provisions of the Budget Act (Haushaltsgesetz) 2004 and of the Supplementary Budget Act (Nachtragshaushaltsgesetz) 2004 satisfy the constitutional requirements. Justices Di Fabio and Mellinghoff and Justice Landau attached dissenting opinions to the decision.


1. The proceedings on the constitutionality of statutes firstly relate to the question as to whether it was compatible with Article 110.1 sentences 1 and 2 of the Basic Law (GrundgesetzGG) that when the federal budget for the financial year 2004 was drawn up, § 1 of the Budget Act 2004 did not undertake the following measures until they were incorporated in the amended version of the Supplementary Budget Act of 21 December 2004:

  • set the Federation’s (target) share of the net profit of the German Bundesbank at the amount of 248 m euros (originally 3.5 bn euros),
  • take into account the fact that the main parts of the Fourth Act for Modern Services on the Labour Market (Viertes Gesetz für moderne Dienstleistungen am Arbeitsmarkt – Hartz IV) of 24 December 2003 did not come into force until 1 January 2005.

In the alternative the applicants petition the court to find that the original version of § 1 of the Budget Act 2004 of 18 February 2004 violated Article 110.1 sentences 1 and 2 GG.
The applicants submit that the 2004 Federal Budget, old version, revealed a “gap” in the amount of 5.51 bn euros. They state that this occurred because there was a mistaken forecast of the Deutsche Bundesbank’s profit for 2003 and inadequate account was taken of the entry into force of the Fourth Act for Modern Services on the Labour Market. The 2004 budget, old version, violated the requirements of balancing, truthfulness and completeness of Article 110.1 and 110.2 GG. In late 2003, they state, it could already be seen that the Bundesbank would be able to pay over to the Federation less than one-tenth of the profit estimated for 2003. From January 2004, there was no longer any doubt that the Bundesbank’s profit would be reduced. Since the Fourth Act for Modern Services on the Labour Market had been passed on 24 December 2003, it had been known that Hartz IV would be moved into the year 2005. The supplementary budget did not succeed in curing the unconstitutionality of the Budget Act 2004, old version. When the 2004 budget, old version, was passed on 18 February 2005, they submit, it was already known that it needed to be corrected both with regard to the profit of the Bundesbank and with regard to Hartz IV. In addition, in May, the Working Party on Tax Revenue Forecasting (Arbeitskreis Steuerschätzung) forecast a shortfall in tax revenue for the current year of approximately 9 bn euros. Consequently, the supplementary budget became absolutely essential at the end of May 2004 at the latest. The supplementary budget procedure, according to the applicants, was misused in order to conceal until the end of the year a shortfall which had existed from the beginning, following which it was disclosed at the last minute and then promptly smoothed out by an increase of the credit authorisation, instead of an elimination in good time by precisely planned budget and public finance instruments. In introducing the 2004 supplementary budget out of time, the Federal Government undermined the Bundestag’s right to authorise expenditure; the Supplementary Budget Act 2004 violated the principle of prior authorisation (Article 110.2 sentence 1 GG), which also applies to supplementary budgets.

2. In addition, the proceedings on the constitutionality of statutes relate to the question as to whether it was compatible with the Basic Law, in particular with Article 115.1 sentence 2 thereof, that § 2.1 of the Budget Act 2004 as amended by the Supplementary Budget Act 2004 authorised the Federal Ministry of Finance to take out credit in the amount of 43.5 bn euros (originally 29.3 bn euros), the amount of which exceeded the unchanged figure for investment expenditure (24.6 bn euros) reported in the supplementary budget to the overall 2004 federal budget. The applicants criticise the fact that this exceeded the borrowing limit of Article 115 GG: the investment amount of 24.6 bn euros budgeted for in the 2004 budget was first exceeded by 4.7 bn euros or 19.1% and finally exceeded by 18.9 bn euros or more than 75%. The Federal Government justifies this – now for the fourth time – by citing the economic equilibrium provision of Article 115.1 sentence 2 GG. The applicants state that it has now become customary for the Federal Government to rely on what this provision, together with Article 109.2 GG and the Stability Act (Stabilitätsgesetz), regarded as merely an exception in the case of a disturbance of macroeconomic stability.

In essence, the decision is based on the following considerations:

I. § 1 of the Budget Act 2004 as amended by the Supplementary Budget Act 2004 was compatible with the Basic Law. It may remain undecided whether the principle of prior authorisation under Article 110.2 sentence 1 GG, which provides that the budget is drawn up in the Budget Act before the beginning of the first financial year, is applicable with the necessary modifications to the introduction of a supplementary budget, for the Federal Government may at all events not be accused of introducing the 2004 supplementary budget out of time in violation of constitutional duties.

The introduction in good time of a supplementary budget Act of the Federal Government is subject to the general principles governing the necessary mutual consideration between constitutional bodies. Consequently, where a draft supplementary budget is introduced out of time, this is not automatically to be regarded as in breach of duty. Instead, the important consideration is on the one hand how far the lateness of introducing the supplementary budget resulted in concrete adverse effects on the parliamentary right to decide on the budget, and on the other hand how far the government can present sufficient objective reasons for this lateness. No substantial concrete adverse effects on parliament’s rights can be established arising from the fact that the supplementary budget was not introduced until October 2004.

The budget appropriations made in connection with the shifting of the date of Hartz IV did not contain any politically weighty independent decisions; they merely subsequently enforced the decisions of the substantive legislation, and in sum they did not create any significant changes in the total revenue and expenditure. More serious from the budgetary point of view are the corrections of the Bundesbank profit in the amount of more than 3 bn euros. In the assessment of an infringement of the Bundestag’s right, it must be taken into account that the Federal Government’s decision to present a supplementary budget at a later date not only conformed to the majority opinion in parliament. The Government was also able to lay claim to solid factual reasons for its decision: considering the fact that the parliamentary summer recess begins in July, it would have been extremely difficult for reasons of time alone to draft government bills containing the comprehensive amendments, both to the Budget Act and to a number of substantive statutes, which the opposition parliamentary groups had called for in May of the same year. In particular in view of the uncertainties which, as experience has shown, are associated with all current tax assessments, it did not appear advisable to react immediately to the latest assessment results of May 2004 with budget adjustments; on the contrary, they were an objective argument for first waiting to see how tax revenue developed. If, against this background, one considers the further course of events, no delays on the part of the Federal Government that were in breach of duty can be found: in the first sessions after the parliamentary summer recess, the 2005 draft budget was deliberated on, and in October the 2004 supplementary budget followed.

II. § 1 of the Budget Act 2004 in its original version also satisfied the constitutional budget requirements.

The appropriation of the Federation’s share of the Bundesbank’s net profit for the year 2003 was compatible with the constitutional requirements of budgets truthfulness (Article 110.1 sentence 1 GG). From this requirement there follows the duty of precise forecasting with the aim of guaranteeing the effectiveness of the budget functions in the parliamentary system of government – management, control and transparency through open state activity. The forecasts necessary to assess revenue and expenditure must ex ante be appropriate and justifiable. The estimation of the expected Bundesbank profit at 3.5 bn euros in the draft Budget Act 2004, old version, was based on the experiences of the previous years. If the appropriation in the Budget Act 2004 corresponds to the results of long-term experience, the Federal Government can only be in breach of duty if at the time in question there were firm indications that the Deutsche Bundesbank’s profit situation had substantially changed. This was not the case either at the time when the bill was introduced in August 2003 nor at a later date until the bill was passed in the German Bundestag in November 2003. Nor was any reliable information on the Bundesbank’s profit situation available during the mediation procedure. In March 2004, that is, after the Budget Act 2004 had been pronounced, the President of the Bundesbank merely made a broad statement before the Bundestag budget committee that the Bundesbank’s profit for 2003 was “appreciably less than 3.5 bn euros”. Against the background of this appropriate restraint in giving information, no breaches of duty of the bodies involved in the legislative procedure can be seen.

The budget estimates in connection with Hartz IV are also compatible with the constitutional requirement of completeness and truthfulness, although it was already certain at the beginning of the mediation procedure on the Budget Act 2004 that the appropriations were “wrong” because of the deferral of the entry into force of Hartz IV until 1 January 2005. In particular because the budget appropriations in question here had no independent weight, because parliament was comprehensively informed on the alternatives applying in this connection, because in practice it was possible to take appropriate account of the amendments in the execution of the budget, the Federal Government was entitled, particularly in view of the advanced state of the legislative procedure, the fundamental differences of opinion between Bundestag and Bundesrat, and the fact that it was foreseeable that further correction would be necessary, to dispense with further delay by preparing and consulting on a supplementary bill and to allocate the necessary corrections to later supplementary budget proceedings.

III. § 2.1 of the Budget Act 2004 as amended by the Supplementary Budget Act 2004 was compatible with the Basic Law, in particular with Article 115.1 sentence 2 GG.

1. Article 115.1 sentence 2 GG limits revenue obtained by borrowing to the amount of expenditure on investments. Exceptions are permitted only to avert a disturbance of the overall economic equilibrium. In its judgment of 18 April 1989 (BVerfGE 79, 311), the Senate delivered a fundamental opinion on the general content and the elements of this constitutional norm. There is no occasion to deviate from the standards developed there.

As early as in 1989, the Senate pointed out that competence for a possible revision of the legislative concept of Article 115.1 sentence 2 and Article 109.2 GG lies with the constitution-amending legislature, not with the Federal Constitutional Court. This principle must be upheld. Admittedly, at present there is scarcely any doubt remaining that the applicable constitutional provisions need to be revised. In the almost four decades since the financial and budget reform of 1967/69, the state borrowing policy in the Federal Republic has, virtually without interruption, one-sidedly encouraged increased borrowing. The legislative concept of Article 115.1 sentence 2 GG has not proved effective in reality as a constitutional instrument for rational control and limitation of state borrowing policy. It is necessary to develop mechanisms which ensure that when latitude is given for public borrowing, this will be compensated for over several budget years. The selection and institutionalisation of regulations which achieve this, and at the same time appropriately counteract the incentive to shift compensatory burdens onto subsequent legislatures, is a complex task, for whose solution current constitutional law provides insufficient guidelines. This task is reserved for and imposed on the constitution-amending legislature.

Article 115.1 sentence 3 GG provides that it is primarily the responsibility of the legislature, not of the Federal Constitutional Court, to define in detail the term “investments” (Article 115.1 sentence 2 GG), which is crucial with regard to the normal macroeconomic situation. In § 13.3 no. 2 of the Federal Budget Code (Bundeshaushaltsordnung – BHO), the legislature only formally satisfied this duty to legislate, as called for by the Senate in its judgment of 1989. The provision simply incorporates the essential contents of what was previously laid down in administrative provisions. Serious doubts have long been expressed on the constitutionality of the concept of investment defined in it, which dominates budget practice. The question is asked whether Article 115.1 sentence 2 GG might be correctively interpreted even under present constitutional law, but since it is not material to the decision, the Senate can leave it open. If the limits on borrowing relied on to date were tightened, this would merely increase the degree to which those limits have been exceeded, in the present proceedings as elsewhere.

Since 1989, the Federation’s borrowing has continued to increase to a striking extent; despite this, it is necessary to adhere to the principles developed by the Senate for recognition of the latitude for estimation and assessment laid down by the parliamentary legislature, even with regard to the definition of a disturbance of the overall economic equilibrium (Article 115.2 sentence 2 GG).

2. By these standards, § 2.1 of the Budget Act 2004, amended version, was still compatible with Article 115.1 sentence 2 GG. The central elements of the reasons set out in the legislative procedure both on the original 2004 budget and also on the supplementary budget for exceeding the investments budgeted for are both the difficult general economic conditions and the failure to meet the sub-targets of a high level of employment and appropriate economic growth. The statement “that in the year 2004 too there will be insufficient growth to increase employment” was undisputedly correct. Considering this statement in conjunction with the justified prognoses on the high number of unemployed, it was reasonable to expect a serious disturbance of the overall economic equilibrium in the year 2004 too. The reasons for the 2004 supplementary budget immediately follow on from the reasoning of the Budget Act and confirm them. Although the economic situation had slightly improved as a result of dynamic foreign demand, development of domestic demand, investment activity and the labour market had actually been lower than expected. In the present situation, the state may not by introducing additional savings measures contribute to increasing the disturbance of the overall economic equilibrium even more. The increase of the authorised public borrowing limits was therefore the necessary consequence of maintaining the original demand policy concept despite substantial shortfall of the revenue originally budgeted for, and it therefore shares the nature of the latter as an understandable and justifiable decision of the budget legislature.

Dissenting opinion of Justices Di Fabio and Mellinghoff

The Senate interprets the relevant provision of the Basic Law on limiting borrowing by the Federal Government in such a way that it can have no effect. This conforms neither to the wording and purpose of the provision nor to the structure of the Basic Law. The federal legislature ought constitutionally to have been given an obligation to put the term “investment” in concrete terms in accordance with general requirements and to present a plan to reduce accumulated debt and to provide for foreseeable gaps in viability in the federal budget, within a period of time prescribed by the Senate.

The Basic Law proceeds on the basis of the dominant concept of a budget which is also substantively balanced, that is, a sound federal budget; exceptions are permitted only in stages and under supervision. The regulatory purpose of the first “exception” foreseen by Article 115.1 sentence 2 first half-sentence GG, the principle of a budget whose expenditure is balanced by regular revenue not financed by borrowing, is based on the financial insight that not every form of borrowing is detrimental to sound and sustained budget management. Financing such investments by borrowing is a particular case of complying with the constitutional requirement that a budget should be adopted only if it is balanced. Investments in this connection means measures increasing value in the assets of the Federation (e.g. acquiring real property, building works that preserve or increase value, investments in enterprises, capital investments) and therefore depreciation (amortisation) and sales of property must correspondingly be taken account of in the budget as negative investments.

Article 115.1 sentence 2 second half-sentence GG, by its wording and by its meaning and purpose, applies only to narrowly defined exceptional situations. The strict wording “exceptions are only permitted” in the Basic Law, just as otherwise in statutory language, is an obvious indication that strict standards are to apply. The system of norms comprising Article 115 and Article 109 GG obliges the budget legislature and the Federal Constitutional Court, which has the duty of supervision, to adapt themselves to the intended extension of the period of assessment, both temporally (extending beyond the respective annuality) and materially (paying due regard to economic development). Neither the legislature nor the Constitutional Court may apply the standard of annuality in isolation and close their eyes to the development of debt and the gaps in viability which arise or increase as a result of the borrowing policy.

The oral hearing showed that measured against the classical four parameters for maintaining overall economic equilibrium, there were not sufficient indications in the year 2004 of a disturbance within the meaning of Article 115 Abs. 1 sentence 2 GG. When there are no disturbances, the principle of sound balanced budget management has priority, for from the outset the Federation and Länder (states) may take account of the requirements of overall economic equilibrium (Article 109.2 GG) outside the special authorisation of Article 115.1 sentence 2 second half-sentence GG only within a balanced and sustained budget policy.

Taken as a whole, state indebtedness whose base amount does not decrease, or does not appreciably decrease, when the economic situation is good, and again and again increases markedly when the economic situation is bad, insidiously endangers the practical possibility of observing important principles of state structure. It encourages a tendency towards deconstitutionalisation, because the political action of the Federal Government increasingly shackles itself and presses to overstep constitutional boundaries. It is this circumstance above all, this effect which gradually distorts the constitutional order, which forces the Constitutional Court to take on particular responsibility.

Dissenting opinion of Justice Landau

Justice Landau criticises the fact that the majority of the Senate, in his view, shows no effort to lay down limits to the excessive state borrowing policy by applying the constitutional budget norms restrictively. He states as follows: it must not be left open for the future how the concept of investments in Article 115.1 sentence 2 GG is to be understood. In addition, it must be made plain that the present provision in § 13.3 no. 2 BHO cannot be regarded as satisfying the constitutional duty to pass legislation defining the concept of investment in more detail, and therefore it may not in future be taken as the basis for determining the standard limit of new borrowing. In the interpretation of the concept of investment, it must be taken into account that the political freedom of drafting of future generations is increasingly being restricted. Consequently, it can only be assumed that investments have a positive effect for the future if financial substance is created which can concretely be assigned to future budget years and in this way relieves them of expenditure of their own. The constitutional definition must therefore be limited in particular to net investments, since only net investments are capable of having a positive growth effect that continues beyond the current period.