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Finances & Administration

What Effects will Demographic Development have on Public Sector Revenues?

As a financially weak federal state, Saxony receives subsidies by way of fiscal equalisation, i.e. from financially better off federal states. The system of equialisation between the various municipalities within Saxony functions in a similar way. The amount of subsidy is particularly dependent on the population of each municipality. The Free State of Saxony, and its various municipalities will have to accept decreases in subsidies in accordance with decreasing populations. For the Free State as a whole, the following applies: Every individual less living in the state will mean approximately 3000 euro less subsidy per annum. A population decrease of for example 25000 inhabitants per year will therefore mean around 75 million euro less income for the Saxon state budget.

What Impact will the declining Population have on Saxony's State Debt?

A declining population means that there are less inhabitants to share the costs of existing loans. The per capita burden for existing loans will therefore increase even if no new debts are incurred. This effect can be counteracted by retiring the debts. Saxony was one of the first federal states to retire debts in 2006, and plans to continue its efforts over the coming years. This will ensure that the per capita debt in the Free State will remain constant despite falling numbers of inhabitants.

Why are State Expenses not simply adapted to Demographic Developments?

Some costs are difficult to lower with a ratio of 1:1 in terms of population decline. Costs for the operation of a water supply network for example, cannot be reduced by ten percent overnight, just because the number of connected households has fallen by one tenth in a specific area. In order to maintain proper functioning, it may even become necessary to spend even more money in the short term. In terms of water supply, it might for instance be advisable to disconnect part of the subterranean network in order to operate with lower overheads in future.

Where population is on the decrease, this might mean slightly increased per capita costs, the so-called cost remanence. Cost remanence occurs where a high level of supply can or will only be gradually adjusted to a decrease in demand.

Here is an example: If a school was designed for 400 pupils, and the number of actual pupils falls to 250, the entire building must still remain in full operation. Hardly any cost savings can be achieves in the areas of building administration, lighting, or heating. Repair and maintenance costs per pupil might even increase.

What Effects will Demographic Change have on Administration?

Cost remanence is a problem for public administration e.g. in municipalities with declining populations. Personnel costs make up a large part of the municipal budget. That is why an administration that was originally designed to cater for a town of 25000 to 30000 inhabitants will be continuously adjusted, once the population decreases to 20000.

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