This paper explores the factors behind the time path of real spending and
revenue in the West German states from 1975 to 2004. The empirical approach
stresses robustness and takes into account a large set of economic and
political variables. Our results suggest that common economic factors and, to
a smaller degree, state-specific economic developments are important
determinants of state fiscal performance. In comparison, the influence of
political factors is limited both in statistical and quantitative terms.
Finally, there is evidence that addressing governance problems and ensuring
flexibility in terms of fiscal strategy are important ingredients for any
policy aimed at improving fiscal outcomes at the state level.