Unprecedented deficits alert issued by local government officials
In a joint statement, the German Association of Towns and Municipalities, the German Association of Towns, and the German Association of Counties have highlighted the escalating financial crisis facing local governments in Germany. The crisis, they claim, is due to a combination of mounting social spending responsibilities, significant public services costs, investment needs, and economic stagnation.
After a decade of surpluses, municipalities began running deficits in 2023, with the deficit tripling in 2024 to €24.8 billion. This fiscal strain is exacerbated by the federal government's growth booster tax relief for companies, lost revenues compensations, and rapidly rising interest payments. Over the next four years, interest payments could potentially rise from €35 billion to €60-70 billion, or up to €100 billion if interest rates rise.
The ongoing tariff war with the US and deep crises in key sectors such as automotive, steel, and chemical industries further undermine local revenue bases. The federal budget for 2026 does not sufficiently address these municipal financial issues, and there are rising calls for drastic cuts to social welfare spending as a response.
To counter this crisis, proposals emphasize the importance of reforming local government financing and decentralizing decision-making power. The European Commission’s upcoming budget negotiations include discussions about strengthening local government capacities to secure investment financing. Decentralized models, such as partnerships among public authorities and financial institutions, are highlighted as practical approaches for improving municipal finance and facilitating sustainable transitions.
The municipal associations are calling on the states to provide "task-appropriate financial equipment" for cities, municipalities, and counties. Currently, municipalities contribute more than a quarter of the total state expenditure but receive only one-seventh of the tax revenues. Many municipalities' reserves have already been depleted, and annual increases of 10 percent or more are pushing every budget into the red.
The deficit in core budgets is expected to grow from 25 billion euros to 35 billion euros in the coming years, leading to liquidity problems, cash credit debt explosion, and a decrease in investments in municipalities and states. The federal government, as the legislator, is also expected to contribute to addressing the municipalities' financial issues.
Budget deficits, emergency budgets, and tough consolidation discussions are a reality in town halls and county offices. The municipalities are facing severe financial problems due to rapidly rising social and personnel costs and annual increases of 10 percent or more. As a result, cities, counties, and municipalities are forced to cut expenditures on voluntary activities like sports clubs, public transport, or economic promotion due to legal obligations.
The municipal associations have spoken of an "unprecedented debt spiral," warning that this growth in deficit will lead to severe liquidity problems, cash credit debt will explode, and investments in municipalities and states will plummet. To avoid this, reforms and decentralization are crucial, with a focus on improving local access to EU and other funds to alleviate fiscal distress.
Economic and social policy reforms are necessary to address the financial crisis faced by local governments in Germany, as the combination of mounting social spending responsibilities, public services costs, investment needs, and economic stagnation has led to increasing deficits and financial strain. In light of this, the federal government should consider decentralizing decision-making power and strengthening local government capacities to secure investment financing, as proposed by the European Commission. Finance and business leaders must also collaborate with political authorities to find practical solutions, such as partnerships among public authorities and financial institutions, to improve municipal finance and facilitate sustainable transitions.
