Abstract

Medium Term Interest Rate Expectation of the Federal Government

The flexibility of the public sector’s, including the Federal Government’s, budget in future can be crucially impaired by the public sector’s debt service obligations. Interest rate payments depend on the contracted debt volume on the one hand and on the level of interest on the other. Parliament decides on future net borrowings and the Federal Ministry of Finance on the level of interest. Since – as a rule – interest rate payments are due ata certain lag, Parliament does not influence the volume of future interest payments when authorizing the amount of net borrowings for the respective year. This means that Parliament does not take account of the effects of such authorization on the budgets of future years. On the other hand, Parliament has a legitimate interest in being informed on the terms and conditions the Federal Minister of Finance has to accept for his borrowings. For, knowing the “price” of the borrowings might well make the legislative authorities change their minds about the volume of borrowing authorizations they give. However, attempts by Parliament to get from the executive its assumptions concerning interest rates have failed on various occasions. In spite of its reluctance to furnish such information, the Federal Ministry of Finance – when presenting its five-year financial plan – must, of necessity, provide data from which conclusions can, at least implicitly, be drawn with respect to the interest rates assumed for the plan period. This paper gives an estimation method in this regard. Since it is possible to estimate the executive’s medium-term interest rate expectations, initially unknown, there is little point in not furnishing such information from the outset and in withholding it from Parliament.