The Budget

“We’re living beyond our means”

The financial decline has been going on for a long time now. Right back at the end of the eighties, trade and industry drew attention to the threats posed by structural issues in public spending. And to make up for what neglected being done in the past, all the more drastic action is called for now. It has been a matter of course for decades for investments to be completely financed with borrowed funds. Only in two years since 1980 have expenditures been slightly less than revenues, namely in 1989 and in 2008. Surpluses in the operational budget used to be used for helping to finance investments, but these days recurring receipts generally don’t even cover recurring expenses.

In 2008, Hamburg’s tax revenues reached an all-time record of EUR 8.8 billion. So then expenditures were brought in line with the substantially higher revenues. Instead of making provision by putting some funds aside, new projects were thought out. The Senate has now stated that the budget has a structural deficit of more than EUR 500 million a year. Unless some kind of counter-action is taken, this “structural gap” will grow to over a billion Euros a year as from the year 2014. But that is not even the whole truth: this year alone, the shortfall in the budget is more than two billion Euros, and in 2011 the figure will be EUR 2.2 billion. Over the next ten years, this gap will reach a good EUR 13 billion – to be filled by taking out yet more new loans and by “mobilising assets”, to use the term coined by the authorities. What is needed though is a thorough consolidation and restructuring of the budget to bring new debts to a halt and prevent assets from being whittled away.

Hamburg’s most serious budgetary problem is the current shortfall at the treasury of around EUR 26 billion. It has reached a historic peak, and in the medium term it will continue to rise even further. By way of comparision: in 1980, debts amounted to just short of EUR 6 billion. From 2009 until 2013, the Senate is planning to take out new loans amounting to well over EUR 10 billion – not in the main budget, mind you, but in ancillary accounts such as “school building” and “measures aimed at economic growth” – in these two areas alone, authority has been granted to take out loans totalling EUR 2.1 billion and EUR 5.7 billion respectively. If the credit facilities are used to the full, then the debts run up over four whole decades will increase by more than a third again in just a matter of years. A large portion of these debts is due to the fact that over the past 40 years, Hamburg has spent a good EUR 32 billion more than it has collected in revenues. The difference has been financed with loans to the tune of EUR 26 billion and by selling off the family silver – meaning for instance shareholdings in corporations such as Hamburger Hafen und Logistik AG (HHLA) and the former Hamburgische Elektricitätswerke (HEW).

As far as Hamburg’s population is concerned, the per capita public debt is currently about EUR 18,000 – and that does not even include the national debt. On looking more closely at the loans taken out, it will be noticed that the funds thus acquired by the authorities have not provided them with any extra leeway. On the contrary: since 1970, it has obtained a good EUR 21 billion in loans, but the interest it has had to pay over the same period has amounted to EUR 25.5 billion.

On projecting this figure up until the middle of the current decade, it becomes evident that Hamburg has spent about EUR 81.5 billion on interest bills alone since 1970. Currently, it is paying more than one billion a year in interest – equivalent to over 10% of the recurring operating expenditures. Every hour (!) the city therefore has to pay more than EUR 118,000 in interest – that’s a luxury car every single hour, or a fleet of 24 luxury cars every single day. Or to put it even more bluntly: hour by hour, Hamburg’s interest bill swallows up three times the gross salary that an average shop assistant earns in a whole year.

It was not until the city had to introduce commercial accounting in 2006, transparently listing depreciations, pension provisions, disposals and outsourcing, that Hamburg’s real financial burden was disclosed. Of its equity (according to the opening balance sheet in 2006: EUR 4 billion), only about EUR 60 million are still left over, or 1.5% of the initial capital. At the same time, any decrease in the value of publicly owned assets is immediately felt, because write-downs have to be posted under financial assets. But even without such “extraordinary items”, the year 2008 would still have closed with a deficit of around EUR 280 million.

In the main budget, the figure given for the city’s huge pension liability is more than EUR 18 billion, but under tax regulations the interest on the cash value of this liability is discounted at a rate of 6%. “Simply discounting at the market rate of interest, as now has to be done under the new Law on Modernising Accounting Legislation, the value will become more and more realistic and a far higher figure will have to be posted in the balance sheet in future,” forecasts Wolfgang Kemsat, President of the Hamburg Chamber of Chartered Public Accountants and himself a CPA. “Big losses will result, pushing the equity into red figures.”

A new clarity – similar to the new transparency of the city’s liabilities in the balance sheet – should be made a feature of the the lingo used in financial politics. “Saving doesn’t mean spending less than was originally planned,” explains Hans-Henning Bernhardt, chairman of the Chamber of Commerce’s Tax & Finance Committee. “It means not spending money and putting it aside instead. The fact of the matter is, we’re living beyond our means, and it’s our children who are going to have to foot the bill.”

A language that everyone can fully comprehend also means not euphemising by using words like “special assets” for loans taken out, or by talking about “mobilising assets” when what is really meant is slogging off the family silver. If the true financial position is clearly depicted, this will certainly encourage greater acceptance of the drastic cuts that will have to be made. When it comes to tightening our belts, the general public is generally more understanding than politicians assume.

Hans-Henning Bernhardt is quite certain: “If revenues aren’t enough to keep up past spending levels, then we’ll have to take a closer look at things, even those we’ve become attached to, like standards, habits and facilities.” Conducting a thorough critical review of all the city’s tasks is going to be inevitable. “Unless we make cuts in all areas, we won’t get anywhere near consolidation. Spending discipline – that’s the absolutely key requirement.”

“In the private sector,” says Dr. Claus Liesner, managing partner of AMC Asset-Management-Consulting GmbH, who for very many years worked for the city in an honorary capacity, “it’s natural to do a cost-benefit analysis before making an investment, so as to be able to set the right priorities.” And this includes looking at the interest payments and operating costs that will be incurred by the investment. “Politicians need to take the same approach for the public purse.”

Apart from doing feasibility studies and monitoring results, there are other aspects that need to be taken seriously by all the decision-makers: an analysis of the initial position; a definition of the objectives; a time schedule; a plan for alternatives; and – above all – the impact on the budget. They need to be applied at the planning stage to any new projects. But in the plans for reforming the school system and in the discussions about a new Stadtbahn, none of these aspects has been given sufficient consideration so far.