Germany: Don't Get Confused by the Sharp Increase in Central Government Interest Expenditure

Budgetary figures of Germany's central government show a sharp increase in interest expenditure over the past two years. The 2023 budget puts central government interest expenditure at EUR 39.9 billion (8.4% of total expenditure), up from just EUR 3.9 billion (0.7%) in 2021. This commentary explains that this tenfold increase in central government interest expenditure is not primarily driven by coupon interest payments on outstanding debt. Instead, central government interest expenditure figures are heavily distorted by the government's cash-based accounting approach for premia and discounts on the issuance of reopened bonds. This approach tends to overstate interest expenditure during periods of rising interest rates and to understate the interest burden in times of falling rates. General government budgetary data which is a more relevant source for interest expenditure shows a more moderate increase in the government's interest burden over the past two years. The pass-through of higher interest rates on interest expenditure has been dampened by the very large share of fixed-rate debt and an average maturity of central government debt of around 7 years.

Key Highlights

• Central government interest expenditure data is compiled on a cash basis and prone to large fluctuations.
• The cash-based accounting approach amplifies the impact of short-term interest rate movements on public finances.
• General government budgetary data is based on accruals accounting and, therefore, a more relevant source for the government's interest expenditure.
• While the relative size of the general government's interest burden has increased moderately, it remains on a much lower level than during much of the previous decade.

“The cash-based accounting approach has led to large and misleading swings in central government interest expenditure over the past years,” said Yesenn El-Radhi, Vice President of the Sovereign Group at DBRS Morningstar. “Putting central government budgetary data on an accruals basis would not only provide a more accurate view on the government’s interest burden but also improve the meaningfulness of debt brake calculations for the central government.“