OREANDA-NEWS. Higher estimates for tax revenue at German states (or Laender) will improve operating margins, and support our view that most Laender will comply with the debt brake from 2020 despite additional spending commitments associated with the refugee crisis, Fitch Ratings says.

Germany's Finance Ministry recently updated its forecasts for Laender tax revenues, projecting a 3.7% increase in 2016, up from the previous estimate of 2.9% in November. Revenues are forecast to increase at a compound annual growth rate of 3.65% from 2015 to 2020, when they are forecast to reach EUR320.5bn, EUR5.6bn higher than in the November estimate.

Taxation traditionally provides a large proportion of Laender revenues, and the higher forecasts partly reflect changes in tax law and partly continuing economic growth (Fitch forecasts German GDP to increase 1.7% this year and 1.8% next year). They support our view that most Laender are in a strong position to comply with the debt brake by eliminating their structural deficit, because revenue growth will continue to exceed spending growth, further improving operating margins.

Fiscal consolidation measures and low refinancing rates coupled with rising revenues have seen the Laender's fiscal performance improve in recent years. The sector posted an aggregate surplus before debt variation of EUR2.8bn last year, up from EUR702m in 2014. Ten of the 16 Laender reported surpluses in 2015, up from nine the previous year, and were able to pay down debt, which remains high (EUR541bn at end-2015).

Efforts to contain spending have focused on restricting current expenditure growth, mainly on personnel (the Laender's largest single expenditure item). Consolidation efforts will be challenged by the costs generated by the arrival of refugees, and this will put additional pressure on Laender budgets following last year's outperformance. Estimates of the total cost vary widely and will depend on the total number of arrivals.

However, the cost will be spread across different tiers of German government, and will be met in part by transfers from the federal government. We still think higher revenues and continuing consolidation in anticipation of the debt brake will enable more Laender to achieve surpluses before debt variation in 2016.

We affirmed seven German Laender at 'AAA'/Stable on 6 May. The ratings reflect the stability of the constitutional solidarity system, whereby all member states of the federal republic are jointly responsible for supporting a Land in financial distress.