Struggling local governments facing economic hardships
In 2023, German municipalities recorded a deficit of 6.8 billion euros for the first time in a long while, marking the beginning of a financial crisis that would escalate the following year. The deficit reached an unprecedented €24.8 billion in 2024, according to the Communal Finance Report of the Bertelsmann Foundation.
High deficits were observed in several regions, with North Rhine-Westphalia (-6.8 billion euros), Bavaria (5.2 billion euros), and Lower Saxony (3.7 billion euros) being the hardest hit. This crisis, considered the greatest post-war crisis, is largely due to an unprecedented deficit that municipalities have faced, leading to a significant investment backlog and severe cuts in social and public spending.
Brigitte Mohn, board member of the Bertelsmann Foundation, predicts a "pessimistic outlook" for the coming years. The crisis is driven by factors including growing interest payments (expected to rise from €35 billion to potentially €100 billion within four years if interest rates increase), the impact of tariff wars, and deep industrial crises.
Inflation rates in the construction industry are particularly high, overshadowing municipal spending. Material costs, which include costs for the operation of buildings or for services, have increased by a quarter in just two years. Consequently, the financial crisis has significantly impaired investment activities by municipalities, particularly affecting housing construction and infrastructure development.
Despite a severe housing shortage in Germany, new home construction dropped by 14.4% in 2024 compared to the prior year, falling short of targets required to meet demand. The government has proposed measures such as economic stimulus packages and fixed low-interest loans to revive construction, focusing on affordable and social housing.
The crisis also jeopardizes long-term economic growth and social welfare, as municipalities play a crucial role in delivering public services and supporting social spending. The rising debt burden and budget deficits limit their ability to invest in infrastructure, worsening the backlog and potentially leading to a decline in public service quality and availability.
Regions like the Saarland, Saxony-Anhalt, Rhineland-Palatinate, and North Rhine-Westphalia are "continuously falling behind" in terms of infrastructure. Representatives of municipalities are demanding a higher share of municipalities in the value-added tax, currently receiving only 3.7 percent, compared to 45.1 percent for the federal government and 51.2 percent for the states.
Main business manager Hans-Günter Henneke (CDU) has demanded that social benefits be reduced if "offers are not accepted without important reason." The German Association of Towns and Municipalities has demanded "performance cuts." Ralph Spiegler, the president of the German Cities and Municipalities Association, demanded an immediate program to secure the operational capacity of municipalities.
In contrast, municipalities in Bavaria are making the highest investments by far. However, the allocations from the federal and state governments in Saxony have increased by only 62.8 percent in ten years, the second-lowest rate of all federal states. Municipalities in Saxony have deficits that are higher than in any other eastern federal state due to these low allocations.
The deficit in municipal finances in 2024 affected all 13 German federal states, with only those in Thuringia recording a slight surplus. This crisis has far-reaching implications, threatening the maintenance and expansion of critical infrastructure and social services, and potentially leading to a decline in public service quality and availability.
[1] German Municipalities Face Unprecedented Financial Crisis [2] Germany's Municipalities Struggle with Record Deficits [3] Germany's Housing Crisis Worsens as Construction Falls Short [4] Germany's Economic Stagnation Worsens Municipal Investment Capacity
- Analysis of the financial crisis in Germany reveals that it is driven by a combination of factors, including record deficits in municipalities, increasing interest payments, the impact of tariff wars, and deep industrial crises, leading to a severe reduction in social and public spending across various regions.
- The escalating financial crisis in Germany, considered the greatest post-war crisis, has negatively affected investment activities by municipalities, particularly affecting housing construction and infrastructure development, exacerbating the ongoing housing shortage in the country.
