Alert Sounds on Significant Financial Shortfalls Warned by Local Authorities
In a joint declaration, three major associations of municipalities in Germany have highlighted the urgent need to address the financial crisis facing local governments. The crisis, they claim, is due to rapidly rising social and personnel costs, leading to significant budget deficits.
The deficits are projected to increase from 25 billion euros to 35 billion euros in the coming years, with many municipalities already having exhausted their reserves. The associations have demanded a significantly higher share of value-added tax in the short term and have emphasized the need to break the expenditure dynamic in social spending.
The federal government, as the legislator primarily responsible for municipalities' burdens, is also expected to contribute. The joint declaration by the federal government and states in Germany proposes several solutions and potential changes focusing on fiscal relief and structural reform.
One of the proposed solutions is compensation for revenue losses and tax relief. The federal government has implemented a “growth booster” providing tax relief for companies and compensating states and municipalities for lost revenue. However, this has not fully addressed local deficits, which reached €24.8 billion in 2024 and are worsening due to rising interest payments.
Addressing mounting interest payments is another key proposal. Interest costs for local governments are projected to increase from €35 billion currently to €60–70 billion within four years, potentially reaching €100 billion if interest rates rise. This growing financial burden is a major cause of local deficits.
The federal government also plans to stimulate housing construction by easing building laws and offering loan programs with favorable, fixed low-interest rates for up to two decades. This aims to increase housing supply, stabilize rents, and indirectly ease local government expenditures associated with housing pressures.
However, the federal budget for 2026 does not explicitly include solutions targeting local government debt restructuring or expanded fiscal autonomy. Instead, the focus is on compensations, tax relief, and broader economic recovery measures.
The reality in town halls and county offices includes deficits, emergency budgets, and tough consolidation discussions. The municipal associations have demanded that states provide "task-appropriate financial equipment" for cities, municipalities, and counties. They warn of a "previously unthinkable debt spiral" if the situation is not addressed.
Currently, municipalities contribute more than a quarter of the total state expenditure but receive only one-seventh of the tax revenues. Annual increases of 10% or more are causing budgets to go into the red, according to the declarations. The associations fear that the deficit could lead to massive liquidity problems, cash credit debt will explode, and investments in municipalities and states will plummet.
In summary, the joint approach currently centers on compensating revenue losses, controlling interest payments, easing construction bottlenecks through financial incentives, and maintaining public services, without fundamental reforms like direct local government debt relief or expanded fiscal powers. The local financial crisis is recognized but addressed mainly via budgetary compensation and economic stimulus rather than structural overhaul.
- The deficits in municipal budgets, projected to increase from 25 billion euros to 35 billion euros, are not only due to rising social and personnel costs but also mounting interest payments, with interest costs expected to rise from €35 billion to €60–70 billion in the next four years.
- The municipal associations have urged the federal government, as the legislator primarily responsible for municipalities' burdens, to address the local financial crisis by providing task-appropriate financial equipment and pushing for fundamental reforms like direct local government debt relief or expanded fiscal powers, warning of a "previously unthinkable debt spiral" if the situation is not addressed.
