Bertelsmann study on municipal finances warns: Germany's city coffers are emptier than ever

For years, all of Germany looked enviously at Bavaria, where the economy flourished, unemployment was low, and buoyant business taxes filled the city coffers. But even where the money was always generously invested in roads, schools, and swimming pools by numerous city employees, the mood is currently changing: The weak economy is causing revenues to dry up, while personnel and social spending are harder to cut.

Even a former boomtown like Ingolstadt in Bavaria is struggling: The city, which long benefited from the success of the car manufacturer Audi, saw its trade tax drop by 60 percent due to the industry crisis. Nervousness is growing at City Hall. So what should other regions say: structurally weak ones like Brandenburg or struggling ones like North Rhine-Westphalia?

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A new study, published this Wednesday and obtained in advance by the RedaktionsNetzwerk Deutschland (RND), provides the answer. And it raises the alarm: According to the "Municipal Finance Report," which academics and practitioners compile every two years for the Bertelsmann Foundation based on current official financial statistics, German municipalities accumulated the largest deficit in their history last year: around 25 billion euros—not cumulatively, but in a single fiscal year.

A warning shot had already been fired in 2023, when the report calculated a deficit for the first time after nine years of surpluses. This figure has now more than tripled: an indication of deeper problems. Unlike in the past, the causes are not primarily on the revenue side: Expenditures rose by ten percent in 2024 alone. Due to inflation, personnel costs exploded, also due to new jobs and high collective bargaining agreements. Above all, social spending grew strongly: by 11.7 percent to €85 billion.

At the same time, revenues are barely increasing. The economy is weakening, and the previously reliable trade tax is shrinking. Overall, municipal revenues grew by a meager 5 percent in 2024. Added to this are additional burdens from federal policy decisions, such as the 2024 increase in the citizen's allowance. In Ingolstadt alone, this resulted in a municipal deficit of almost nine million euros.

Foundation director Brigitte Mohn uses the buzzword "turning point": from a time when municipalities financed key everyday tasks for the population, whether infrastructure or local life from daycare centers to nursing homes, to a time when they can no longer do so. Today, investments are at a standstill in many places, fees are rising, and social services are being cut.

While the crisis affects the entire country, its effects vary greatly from region to region. Economically strong states like Hesse and Bavaria, whose municipalities are heavily dependent on economic fluctuations, are experiencing particularly high per capita deficits. Remember: those who climb high can fall far.

Brigitte Mohn, Executive Board Member of the Bertelsmann Foundation.

Source: Friso Gentsch/dpa

In eastern Germany, however, high allocations ensure the survival of many municipalities. In some cases, more than 50 percent of municipal revenues come from federal and state funds.

But this also comes at a price: In regions with low tax revenue, autonomy is declining. The "Financial Report" finds that in many eastern German municipalities, the ability to act is severely limited despite formal self-government. Investments are low there – unlike in Bavaria and Baden-Württemberg, where municipalities can continue to spend large sums in many areas. 17 of the 20 municipalities with the lowest tax revenue are located in the east.

"The deficit permanently calls into question the financial capacity of local authorities," warns foundation director Mohn, referring to the situation in Germany as a whole: Because town halls shoulder more than half of all public investments, social cohesion is at risk nationwide.

Especially since the outlook is bleak: Structural problems – such as social spending – remain unresolved, spending is permanently elevated due to inflation, and the economy remains weak. Major challenges lie ahead, such as adapting cities to climate change and infrastructure to more extreme weather – the disasters in the Ahr Valley and, most recently, on the Biberach railway line were early warnings.

Mohn believes the federal and state governments have a responsibility: "We need state reform because otherwise municipalities will no longer be able to perform these important tasks." The core must be: fewer tasks for municipalities, more money from the federal and state governments.

Although many municipalities are placing high hopes in the federal government's new special infrastructure debt, which is currently being distributed among the states, the Bertelsmann Foundation fears a flash-in-the-pan effect without major structural reform. Entirely new steps are needed. Co-author Kirsten Witte, a municipal expert at the foundation, proposes, for example, transformation funds and special federal-state funds: not small, patchy fixes, but a surgical intervention in the federal financial architecture.