Local financial struggles demand rapid change in local fiscal systems

In a stark revelation, the Bertelsmann Financial Report 2025 and various political voices have highlighted a severe financial crisis in Germany's municipalities. The crisis, the worst since post-war times, has seen a dramatic shift where municipalities moved from surpluses to a €24.8 billion deficit in 2024 [1].

The root cause of the crisis is a 10% increase in expenditure, coupled with a revenue issue that has left cities and municipalities chronically underfunded [1]. The ongoing material expenditure has increased by a quarter in two years due to inflation, while social expenses have swelled by a quarter to 85 billion euros in the same period [1]. Personnel expenses have doubled in the past decade due to job growth and high wage agreements.

Sorin Pellmann, Leipzig MP and chairman of the Left faction in the Bundestag, has criticised the aloofness of federal politics in the debate over municipal funding. He calls for a comprehensive municipal finance reform, including an old debt fund, permanent and adequate municipal financial equipment, and more financial independence [2].

The proposed solutions centre on increasing financial support to local governments and giving them greater autonomy in managing funds. Key solutions include:

Increased Federal and State Support: Although the federal budget allocates funds to compensate states and municipalities for revenue losses, this is currently insufficient to address the growing deficit in municipalities' budgets [1].
Legal and Fiscal Framework Reforms: Proposals call for establishing legal frameworks for special municipal funds and more flexible budgeting approaches, enabling municipalities to manage finances more independently and innovatively [2].
Recognition of Multilevel Governance: A central suggestion is to embed multilevel governance as a core principle in financial planning, ensuring local governments are treated as full partners in funding decisions, particularly relating to social services and climate initiatives [2].
Innovative Financing Models: Encouragement of new financial instruments such as public-private partnerships (PPPs) and other innovative financing platforms to unlock investment at the municipal level [2].
Federal Debt Brake Suspension: Germany’s recent historic shift to suspend the “debt brake” allows for increased federal borrowing aimed at infrastructure and social investment, indirectly easing municipal financial strain by addressing infrastructure deficits that municipalities face [4].
Political Advocacy by Local Leaders: Politicians like Sascha Wagner and Burkhard Jung have emphasised the need for structural reforms and more direct support for municipalities. Jung, the current President of the German Towns' Association, points to the deteriorating state of local services and infrastructure as making urgent intervention necessary to avoid deeper social and economic consequences [1].
Broader Economic Revitalization Efforts: National-level plans, such as the investment push by major German firms pledging €631 billion for growth and infrastructure, indirectly support municipalities by bolstering the overall economy and tax base, though municipalities still require targeted financial remedies [3].

Lars Klingbeil, the Federal Minister of Finance (SPD), plans to take on one billion euros in new debt in the coming years to address the crisis [5]. Ten NRW cities are among the top 20 with the highest cash credits, with Mühlheim and Oberhausen almost at the five-digit mark per capita [6].

The crisis is particularly pressing as municipalities bear a wide range of social tasks, which are mainly regulated by federal law but are often not sufficiently co-financed by the federal government [1]. The ongoing financial crisis threatens the sustainability of social services and investments in these municipalities.

References:

[1] Bertelsmann Financial Report 2025 [2] Proposals for Municipal Financial Reform by Sascha Wagner and Burkhard Jung [3] National-level Plans for Growth and Infrastructure [4] Federal Debt Brake Suspension [5] Federal Minister of Finance Lars Klingbeil's Statement on Municipal Debt [6] Municipal Debt Levels in Germany

The financial crisis in Germany's municipalities, dating back to post-war times, has prompted severe discussions in business circles, political arenas, and general news forums. The crisis, exacerbated by a 10% increase in expenditure and revenue issues, has escalated to a €24.8 billion deficit in 2024 [1]. Calls for change in policy-and-legislation are growing louder, with proposals for increased federal and state support, legal and fiscal framework reforms, recognition of multilevel governance, and innovative financing models [2]. Lacking substantial federal funding, structural reforms, and direct support are now considered crucial by political leaders like Sorin Pellmann and Sascha Wagner [2][1].