Unprecedented deficit levels alerted by local officials
Local governments in Germany are grappling with significant financial challenges, as budget deficits have surged to €24.8 billion in 2024 after a decade of surpluses until 2022. The financial strain is due to a combination of factors, including the impact of the federal government's tax relief for companies, rising interest payments on public debt, economic difficulties, and increased social spending responsibilities.
The growth booster tax relief for companies has reduced tax revenues for municipalities and states while increasing their financial burdens. Meanwhile, interest payments on public debt, currently at €35 billion, are expected to escalate to €60-70 billion within four years, or even €100 billion if interest rates rise further. Economic difficulties, such as the tariff war with the US and crises in key sectors like automotive, steel, and chemicals, have contributed to ongoing economic stagnation, exacerbating local government financial stress.
Local governments shoulder a significant responsibility for social spending, public services, and investments. However, federal budgets have not adequately addressed their funding crises, with a growing push at the federal level for cuts in social welfare.
In response to these challenges, local authorities have made several demands towards federal and state governments. They seek recognition and support to mitigate their burgeoning deficits due to tax reliefs and rising interest costs. Greater fiscal autonomy and reform in local government finance structures, such as revising local government needs assessment and more systematic territorial equalization, are also requested. A forum for regular dialogue and coordinated financial management between local authorities and higher government levels is another demand. Exploration into local tax reform and possible allocation of national tax revenues to local government to stabilize their financial health in the long term is also on the table.
The federal government, on the other hand, is emphasizing strict budget consolidation and fiscal discipline, with a focus on efficiency, critical review of public functions, and prioritization of expenditures. While aiming to boost growth through investment and tax fraud countermeasures, the government's budget plan does not directly address the growing municipal deficits but focuses on overall fiscal consolidation and growth-oriented reforms.
The local government associations have demanded "task-based financial equipment" from both the federal and state governments. Emergency budgets and austerity rounds are common among local governments, and many municipalities have already exhausted their reserves. The deficit is expected to grow from the current 25 billion euros in core budgets to 35 billion euros in the coming years.
The municipalities have requested a significantly higher share of value-added tax in the short term. The associations have highlighted the imbalance in the current financial structure, with municipalities contributing significantly more than they receive in revenues. The federal government is seen as having a crucial role in addressing the local government deficits as the primary legislator.
The German Association of Towns and Municipalities, the German Association of Towns and Municipalities, and the German Association of Towns and Municipalities have issued a joint declaration stating this. Annual increases of 10% or more are putting significant strain on local government budgets. Investments in municipalities and states are expected to plummet due to these issues.
The associations have emphasized the need to break the expenditure dynamic in social spending. They have demanded "task-based financial equipment" from both the federal and state governments to address the financial challenges faced by local governments. The confluence of shrinking revenues, rising costs, and economic headwinds is driving deficits and prompting demands for structural reform and better financial support from the federal and state governments.
- The financial relief given to businesses by the federal government has reduced revenues for municipalities, increased their financial burdens, and is a significant factor in the growing deficits local governments are facing.
- Local governments are demanding a higher share of value-added tax from the federal government, stating that they are currently contributing more than they receive in revenues, and this imbalance needs to be addressed to help alleviate their financial difficulties.
