Despite strongly equalized per capita revenue and similar budgetary institutions, fiscal performance is increasingly diverging across German federal states. Given that state and local governments are endowed with expenditure autonomy, this paper investigates whether the composition of sub-national government expenditure has an impact on the degree of indebtedness. A panel analysis for the 1974-2010 period indicates that aside from socio-economic and political factors, the budget structure plays an important role. As expected, a higher ratio of government consumption to investment has a debt-augmenting effect, though, considered separately, larger budget shares of both investment and personnel expenditure are associated with lower debt. Particularly states spending more on transport and communication, and law and order are less indebted, while social spending has a detrimental effect on debt levels.
public debt expenditure composition sub-national government German states