The Unification Treaty provided that the new federal states should from the very beginning be incorporated as far as possible into the financial system established by the Basic Law. Thus since 1991 the new states have been subject to basically the same regulations with regard to budgetary management and tax distribution as the states of the “old” Federal Republic. A “German Unity Fund” was set up to provide financial support for the new states and their municipalities. It was fed jointly by the Federation and the western states, most of the money being raised in the capital market. Until the end of 1994, this fund was a substitute for a nationwide financial equalization arrangement among the federal states.

In 1995 the German Unity Fund was replaced by the restructured federal financial equalization regime. Through this restructuring the new states have for the first time been included in a nationwide financial equalization arrangement. Under the restructured financial equalization regime, the new states and their municipalities receive transfer payments totaling approximately DM 50 billion per year to supplement their own financial resources.

Since the old states shoulder a considerable share of the burden entailed ‘n these transfer payments through the horizontal turnover tax equalization regime and the state financial equalization regime, the Federation has transferred to the states seven turnover tax points from its share of revenues accruing from the turnover tax. In addition, the Federation makes substantial transfer payments in the form of federal complemental grants (1997: roughly DM 1 8.6 billion) and furnishes financial assistance under the Investment Promotion Act Recovery East (DM 6.6 billion). These financial resources will permanently enable the new states to manage their affairs on their own financial responsibility.