Urban areas persist in plunging towards financial deficits
In a concerning development, a survey conducted by the Household City Council in Stuttgart has revealed that the number of cities able to balance their household expenses has decreased. The survey, which covered approximately 5.4 million citizens, included 60% of the 205 city council members in Germany, but did not include all cities.
The financial troubles of German cities can be attributed to several factors. The decline in trade tax revenues, a significant part of local government income, has been influenced by corporate tax pressures and economic stagnation. This, in turn, has reduced the tax base cities rely on. Although Germany is planning a corporate tax reform to lower rates by 2028, the current high tax rates can discourage domestic investment.
Moreover, there has been a trend of shrinking allocations from both federal and state governments, which are essential in supplementing city budgets. This combination has put many municipalities, especially poorer communities like those in the Ruhr region of North Rhine-Westphalia, in a precarious financial position.
To address this crisis, the state has promised municipalities an advance payment of around three billion euros from various funds to prevent payment defaults. The advance payment, intended to strengthen the liquidity of municipalities, is expected to be used up by autumn, according to Ralf Broß. However, it is important to note that this is a one-off effect, as per Broß's statement.
The financial bottlenecks in municipalities are being offset by costs in public transport, the Bundesteilhabegesetz, and hospital expenses. Despite these efforts, only 20% of participating cities in Germany can currently balance their household expenses with sufficient income, a decrease from 31% last year.
The Baden-Württemberg City Council has spoken of "aggressively rising costs" in municipalities, further exacerbating the financial difficulties. The growing district surcharges are making it increasingly difficult for municipalities to balance their budgets.
The association has welcomed the advance payment from the state, but it is clear that structural reforms at both federal and local levels are necessary to ensure the long-term financial stability of municipalities. Without such reforms, many town halls risk running out of financial breathing room, potentially leading to further crises.
[1] Source: Der Spiegel [3] Source: Handelsblatt
- Businesses and corporate tax in Germany are causing strains for municipalities, as shrinking trade tax revenues are affecting their income sources, particularly due to economic stagnation and corporate tax pressures.
- The financial stability of municipalities, especially in regions like the Ruhr area, is being threatened by reduced allocations from both federal and state governments, growing district surcharges, and escalating costs in areas such as public transport, Bundesteilhabegesetz, and hospitals.
