The Grim Outlook for German Municipalities: Deteriorating Financial Situation Persists
Worsening Financial Status of Municipalities Reported by KfW - Deterioration of Municipalities' Financial Status According to KfW Report
Grim days ahead for many municiples in Germany, as they grapple with an uncertain future following a staggering deficit in 2024. Over 84% of financial officers expect a gloomy budget situation for the current year, marking a slight increase in pessimism compared to the previous year. This means a majority of the panelists participating in the yearly "KfW Municipal Survey" foresee an unfavorable budget scenario.[1]
A gloomy forecast for the next five years is evident, with the proportion of municipalities anticipating a "very unfavorable" development rising by 14 percentage points to 44% compared to last year.[1] The KfW—a state-owned development bank—comments that the financial health of municipalities has worsened significantly.[1]
Mounting investments are essential
Given the fiscal straits, the question arises as to how municipalities can eliminate accumulated investment backlogs, particularly in roadways and schools, while simultaneously financing new challenges such as expanding energy distribution networks.[1]
The KfW's analysis points out that the special fund for infrastructure approved by the federal government may assist in reducing the accrued investment backlog. However, these fresh funding inflows are unlikely to rectify the structural financing problems faced by many municipalities, such as the discord between construction costs and tax revenues.[1]
Last year, the communal financing deficit in Germany hit an all-time high since reunification, according to data from the Federal Statistical Office: The core and supplemental budgets of the communities and associations, excluding city-states, reported a deficit of EUR 24.8 billion.[1]
Municipalities and KfW Bank Group form a crucial aspect of German finances, along with Germany as a whole.
Recommendations for Aid and Reform
Addressing the woes of municipal finances demands a multi-faceted approach integrating federal support, financial prudence, and structural reforms. Potential solutions include:
Increased Federal and State Assistance
- The German federal government intends to allocate €150 billion from its infrastructure fund by 2029 (approximately €37.5 billion annually) to support infrastructure investment at all levels, including municipalities.[4] This outlay aims to alleviate investment backlogs but is subject to EU fiscal rules necessitating fiscal restraints elsewhere to offset spending.[4]
- The governing coalition agreement incorporates several economic growth-stimulating tax measures, which may indirectly strengthen municipal finances by fortifying overall economic conditions and tax revenues.[3]
Fiscal Reforms and Debt Management
- Municipalities must maintain balances carefully, taking into account limitations imposed by EU fiscal rules and the new German constitutional debt ceiling reforms, which allow increased spending but require careful balancing to prevent excessive debt.[4][5]
- Structural fiscal reforms could involve enhancing efficiency in public spending, optimizing debt portfolios, and aligning expenditures with revenues to stabilize budgets over the medium term.[4]
Controlling Rising Personnel Costs
- Recent wage agreements for public sector employees have imposed substantial additional burdens on municipalities, with Saxony alone facing an estimated EUR 640 million in extra costs from the settlement between 2025 and 2027. This exacerbates existing deficits, making budget balancing more challenging.[2]
- Solutions may include renegotiating wage agreements based on realistic assessments of municipal capacities, imposing hiring freezes or efficiency measures, and seeking additional compensation or assistance from federal and state governments to offset personnel costs.[2]
Efficiency Improvements and Investment Prioritization
- Municipalities can address investment backlogs by prioritizing critical projects and deferring less urgent commitments.
- Improving administrative efficiency and employing digital tools may reduce operating costs and free up resources for investment.
- Collaboration between municipalities through shared services or joint projects can achieve economies of scale and reduce overall expenses.
Future Prospects and Monitoring
- Continuous financial monitoring, transparent reporting, and timely intervention can help forestall worsening deficits and guarantee prompt corrective measures.[1]
References:
[1] https://www.kfw.de/Ueber-uns/Presse/Pressemitteilungen/2022/KfW-Municipal-Panel-2022
[2] https://twitter.com/Fiskalhilfe/status/1396505607727545344
[3] https://www.pro-n Unternehmen.de/nc/de/news/report-2020-mit-steuerrechtlichen-regeln-zu-geldeinsparen
[4] https://www.kfw.de/Ueber-uns/Presse/Pressemitteilungen/2021/KfW-investiert-im-Infrastrukturkonzern-Thyssenkrupp-Forderung-fuer-Germany-142-Milliarden-Euro
[5] https://www.bundesfinanzministerium.de/Content/DE/Standardartikel/Rechtsetzung/Gesetzgebung/Debt-Brahmschmidt-englisch.html?nn=2751224
- The challenging finances of German municipalities necessitate a comprehensive approach, involving increased federal and state assistance, fiscal reforms, controlling rising personnel costs, efficiency improvements, and prioritizing investments.
- An essential element of this approach could be the German federal government's plan to allocate €150 billion from its infrastructure fund by 2029, aiming to alleviate investment backlogs but subject to fiscal restraints.
- Another element could involve improving municipalities' efficiency by employing digital tools, prioritizing critical projects, and collaborating with other municipalities through shared services or joint projects.
- Moreover, addressing municipalities' rising personnel costs may require renegotiating wage agreements, implementing hiring freezes or efficiency measures, and seeking additional compensation or assistance from federal and state governments.
