SOLID FINANCES
Municipalities have long since run out of money
Germany's towns and villages are sinking deeper and deeper into financial difficulties. While the federal government kept bragging about the “black zero” for years, municipalities were piling up debt. The culprit is not only COVID-19, but also a lack of structural reforms as well as ill-advised savings attempts.
Text: Jacob Wolf
Illustrations: Emmanuel Polanco
SOLID FINANCES
Municipalities have long since run out of money
Germany's towns and villages are sinking deeper and deeper into financial difficulties. While the federal government kept bragging about the “black zero” for years, municipalities were piling up debt. The culprit is not only COVID-19, but also a lack of structural reforms as well as ill-advised savings attempts.
Text: Jacob Wolf
Illustrations: Emmanuel Polanco
Germany's municipalities keep complaining about financial difficulties. For a long time, their distress calls have not been taken seriously; now the situation is about to get out of hand. In 2021 alone, municipal debt rose by 4.1 percent. What's particularly alarming about it, is that while the debt burden in core and extra budgets declined by 0.1 percent, the indebtedness of other public funds, institutions and enterprises went up by 7.8 percent. In the last decades, decision makers failed to implement overdue structural reforms, especially with regard to digitalisation. As early as the late 1990s, our municipalities and their administrations were not positioned for further growth any more.
Even the savings initiatives of the past are costing them dearly today. Decision makers ran down the public infrastructure, used up the asset base and saved where they should have invested. Which is why today, a plethora of new construction projects is needed, from roads and sewers to public transport. Our municipalities still have a hard time coming up with reliable revenue forecasts. That is above all due to the strong impact of trade tax on municipal budgets. Revenues fluctuating by 5 to 10 percent is not unusual. When the economy is strong, that often leads to a pleasant surprise. In times of inflation and economic stagnation, however, it can go the other way, too. Besides, on the municipal level it is often politicians in an honorary capacity who are responsible for the nearly 300 billion euros worth of debt. Budgetary authority lies with them. But the question is: are they really up to the task of dealing with the complexities of a municipal budget?
Powerful administration
This is why in most municipalities it is the administration that is in charge of public finances. And administrators usually don't initiate a fundamental overhaul of processes, but rather continue or expand on existing approaches. Which leads to bloated budgets that often contain unnecessarily expensive solutions. A healthy audit and control culture is nothing more than wishful thinking. And a lack of cooperation with other municipalities, both on a political and on an administrative level, leads to expensive isolated solutions instead of best practices being shared.
Some of the blame for the dire straits of towns and villages falls to federal and state governments, though. They have delegated more and more responsibilities to or expanded existing tasks of municipalities. The legal right to all-day schools for example led to additional costs. And fiscal reforms such as the elimination of the so-called “cold progression” are weighing on municipalities, too. In 2023 and 2024 alone, towns and villages lost 4.2 billion euros in tax revenues because of it. The “Deutschlandticket” granting unlimited access to all local and regional public transport leads to revenue shortfalls at municipal transport authorities; and that is despite the 3 billion euros in loss relief promised by federal and state governments.
Municipalities’ pressure to consolidate is immense. We can only hope it will lead to overdue reforms being implemented now. There is no denying the fact, though, that austerity is a lot less popular on the municipal level than it is on the state or federal level.
Jacob Wolf is deputy secretary of the FDP parliamentary group in the city of Frankfurt am Main.
Jacob Wolf is deputy secretary of the FDP parliamentary group in the city of Frankfurt am Main.
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