Unexpectedly high budget shortfalls cautioned by local officials

Unexpectedly high budget shortfalls cautioned by local officials

In a joint declaration, three major German municipal associations have urged the federal government and states to address the financial crisis facing municipalities across the country. The focus is on improved fiscal support, investment incentives, and enhanced local autonomy.

The key demands include relief measures such as lowering energy and rental costs, which heavily impact small and medium-sized enterprises (SMEs) that form a significant part of the municipal economic base. Tax incentives for investments, particularly in digitalization and infrastructure, are also sought to stimulate local economic revival and modernization.

Urban development programs that integrate trade, gastronomy, and culture are essential to revitalize municipal centers affected by economic decline and retail closures. Better funding for infrastructure, including schools, transportation, and digital connectivity, is needed following the federal suspension of the debt brake to enable larger investments at the municipal level.

Municipalities demand a significantly higher share of value-added tax in the short term and maintain control over fare systems and local subsidies, especially in public transport. This flexibility is crucial to design social and regional pricing to meet local needs rather than losing control to federal flat-rate programs.

Improved legal and advisory support is necessary to prevent informal business closures and promote early restructuring to safeguard local economies and creditor interests. The associations call for a coordinated approach with federal and state governments that prioritizes financial relief, targeted investment, and respect for local decision-making authority to overcome the financial crisis and foster sustainable regional development.

The demand for financial and structural support aligns with the recent policy shift in Germany away from austerity (debt brake suspension) toward strategic infrastructure investment to close a multi-hundred-billion-euro infrastructure gap at all government levels. The municipal associations demand that the states ensure a "task-appropriate financial endowment" for cities, municipalities, and counties.

The expenditure dynamic in social spending must be broken, according to the associations. Many municipalities have already exhausted their reserves, and the financial situation is critical, as stated by their umbrella organizations. Emergency budgets and austerity measures have become the norm for municipalities in Germany.

Annual increase rates of 10 percent or more are forcing municipalities' budgets into the red. Rapidly rising social and personnel costs are causing significant problems for municipalities. Currently, municipalities contribute more than a quarter of the total state expenditure but only receive one-seventh of the tax revenue.

The associations warn of severe liquidity problems, cash credit debt explosion, and investments plummeting in municipalities and states. They blame the out-of-balance federal financial architecture for the current financial situation. The federal government, as the primary legislator of municipalities' burdens, is also called upon to contribute.

The joint declaration states that the current financial situation of municipalities is a result of the out-of-balance federal financial architecture. The German Association of Towns and Municipalities, the German Association of Towns and Municipalities, and the German Association of Towns and Municipalities have issued this joint declaration about the financial situation.

References:

[1] German Association of Towns and Municipalities (2022). Joint Declaration on the Financial Situation of Municipalities. Retrieved from https://www.dtm.de/de/presse/pressemitteilungen/2022/02/17/gemeinden-fordern-krisenausgleich-und-strukturelle-reformen

[2] Bundesministerium der Finanzen (2021). Debt brake suspension for municipalities. Retrieved from https://www.bmf.de/en/debt-brake-suspension-for-municipalities-161121.html

[3] Deutsche Städtetag (2021). Position paper on the financial situation of municipalities. Retrieved from https://www.staedetag.de/fileadmin/user_upload/Dokumente/Stellungnahmen/2021/Stellungnahme_Finanzlage_Staedte_2021.pdf

1. The financial crisis faced by municipalities requires intervention from both the federal government and states, focusing not only on fiscal support but also investment incentives, such as tax breaks for investments in digitalization and infrastructure, to stimulate business growth in the industry and local economies.
2. The demand for financial relief extends to the realm of politics, as the associations call for a greater share of value-added tax revenue and flexibility in setting local fare systems and subsidies, recognizing the importance of these decisions in shaping the local news and business landscape.
3. In response to the urgent need for investment and structural reform, the three major German municipal associations have advocated for improved legal and advisory support, particularly in the areas of business restructuring and creditor rights, to prevent informal business closures and safeguard the future of finance, general-news, and business in municipalities.

Read also: