Growing unrestricted expenditures pushing municipalities towards unprecedented deficits - Municipal Expenditures Unchecked Lead Local Governments into Historically High Deficit Levels
The financial situation of Germany's municipalities is facing a significant challenge, with deficits reaching record highs and urgent investments being affected. According to the Communal Finance Report 2025 published by the Bertelsmann Foundation, the cumulative investment backlog stands at around €215 billion, primarily due to high inflation and weak economic growth.
The crisis in municipalities is most pronounced in states like Bavaria and Hesse, where the deficit reached a record high of minus 6.8 billion euros in 2024, more than tripling compared to the previous year. Kirsten Witte, the communal expert at the Bertelsmann Foundation, warns that municipalities will not be able to finance the necessary funds for climate adaptation alone.
Federal Transfers and Investment Support
Municipalities are facing a large investment backlog, with deficits in schools, public transport, and digital infrastructure. Federal transfers under the Municipal Investment Promotion Act (KInvFG) have so far covered only a small portion of this backlog, leaving systemic underfunding unresolved. Efforts to reform resource distribution formulas, such as the Länderfinanzausgleich, have stalled, with wealthier states like Bavaria and Hesse disputing the fairness of the formula due to mounting local budget pressures.
Budget Reallocation and Targeted Spending
The 2026 federal budget plan features a record €520 billion overall, with increased funds for social affairs, housing, and urban renewal. Despite a 10-billion-euro cut in the Transport Ministry’s budget, infrastructure investments will be sustained by redirecting funds to a new Infrastructure and Climate Neutrality fund, supporting essential municipal projects indirectly. Additional increased spending on social housing, early childhood education, and the extension of transport passes aims to ease pressures on municipalities.
Fiscal Consolidation and Economic Growth Initiatives
The German government faces substantial projected deficits, with plans emphasizing fiscal prudence across ministries. Proposed solutions include reforms to streamline planning processes and a "growth booster" package offering corporate tax relief to stimulate economic recovery, hoping to improve tax revenue and reduce fiscal strain on municipalities over time.
In summary, the combination of increasing targeted federal investment, reallocating budgets to priority areas, seeking reforms in fiscal equalization, and measures to boost economic growth forms the core strategy to manage record municipal deficits. However, political challenges remain, such as inter-state disagreements over fund distribution fairness and ongoing economic headwinds limiting immediate fiscal consolidation options.
Municipalities are responsible for over 50% of public investments and are crucial for social cohesion. The chronic underfunding of municipalities needs to be resolved through long-term structural reforms, according to Kirsten Witte. The states are also expected to play a role in improving the municipal situation. The Bertelsmann Foundation collaborates with the Technical University of Wildau and the German Institute of Urbanistics (Difu) for the preparation of the report.
[1] Bertelsmann Stiftung (2025). Communal Finance Report 2025. Retrieved from https://www.bertelsmann-stiftung.org/de/publikationen/2025/communal-finance-report-2025 [2] Bundesregierung (2026). Bundeshaushalt 2026. Retrieved from https://www.bundesregierung.de/breg-de/themen/haushalt/haushalt-2026,17619 [3] Bundesministerium der Finanzen (2029). Bundeshaushalt 2029. Retrieved from https://www.bmf.bund.de/de/haushalt/haushalt-2029.html
- The Communal Finance Report 2025, published by the Bertelsmann Foundation, underlines the urgent need for policy reforms in the industry of municipal finance, given the record high deficits and investment backlog, primarily due to high inflation and weak economic growth.
- The federal transfers under the Municipal Investment Promotion Act (KInvFG) have only barely scratched the surface of the vast investment backlog in municipalities, necessitating a reevaluation of employment policy and resource distribution formulas, such as the Länderfinanzausgleich, to ensure equitable financial support among states.
- In light of the municipalities' crucial role in business, social cohesion, and general news, long-term structural reforms are required to address the chronic underfunding, with potential solutions involving policy changes in politics and policy-and-legislation to streamline planning processes and boost economic growth, consequently easing pressures on municipal budgets.
