Municipalities overspending, leading to significant budget deficits, reveals new research - Municipalities surpass budgets excessively, plunging towards historical financial lows
In a recent report by the Bertelsmann Foundation, it has been revealed that many German municipalities are grappling with record deficits, largely due to rising social expenditures and personnel costs. The deficit last year amounted to a staggering 24.8 billion euros, according to the 2025 Municipal Finance Report.
The root cause of this financial predicament, as identified by the authors of the study, includes inflation, rising social expenditures, wage increases, and higher energy prices. Social expenditures, in particular, have jumped by a quarter in the past two years to reach 85 billion euros.
The deficit is not due to a decrease in revenues but an increase in expenditures by ten percent. Cities and municipalities in Bavaria and Hesse finance over 40% of their budget from taxes, while in eastern states, it's less than 25%. This financial situation varies greatly among federal states, with only 8 eastern municipalities reaching the federal average in tax revenue.
To address these structural problems, the Bertelsmann Foundation advocates for long-term structural reforms focused on improving financial sustainability. These reforms include:
- Reforming social expenditure frameworks at the municipal level, which are currently the main drivers of deficits. This could involve adjusting cost-sharing mechanisms or benefit structures to better align with municipalities' fiscal capacities.
- Rationalizing personnel costs by improving efficiency in municipal staffing and possibly reforming public sector wage and staffing policies, ensuring they are sustainable within the municipalities’ budgets.
- Strengthening financial management and control at the municipal level to monitor expenditures more effectively and avoid budget overruns.
- Enhancing municipal autonomy paired with responsibility, allowing local governments more freedom to generate revenues but also holding them accountable for fiscal discipline.
- Encouraging digitalization and administrative modernization, which can help reduce administrative costs and improve service delivery, indirectly relieving financial pressures.
The Foundation emphasizes that without comprehensive, systemic reforms targeting the root causes—social spending and personnel expenses—municipalities will continue to face insolvency risks and diminishing capacity to deliver public services effectively.
Previously, crisis regions like Saarland and Rhineland-Palatinate have implemented aid programs, but their successes are at risk due to new deficits. The financial situation of municipalities in 2024 is critical and raises questions about their ability to act. The chronic underfunding can only be addressed through long-term structural reforms, for example, in social expenditures.
Brigitte Mohn from the Bertelsmann Foundation calls for a state reform due to municipalities' inability to fulfill important tasks without it. The problem of cash credits is increasingly concentrated in North Rhine-Westphalia, with a quarter of the federal German volume falling on just nine cities in this state. Before 2013, municipalities could reduce their cash credits over seven years. Cash credits are a central crisis indicator.
Personnel costs have doubled within ten years due to an increase in positions and high wage agreements. René Geißler, co-author of the study, explains that the hard-won successes of recent years are at risk due to new deficits. The rest of the budget in municipalities comes from fees, contributions, and financial allocations.
Municipalities in Germany invested a record sum of 52 billion euros last year, highlighting their significant role in public investments and social cohesion. It is crucial to ensure the financial stability of these vital entities to maintain the quality of life for millions of Germans.
- The financial instability of German municipalities, as highlighted by the Bertelsmann Foundation, is primarily attributed to rising social expenditures, personnel costs, and inflation, which are key areas addressed in their proposed employment and community policy reforms.
- To sustain the financial health of municipalities and maintain social cohesion in Germany, the Bertelsmann Foundation emphasizes the need for structural reforms focusing on revisions in employment policies, such as reforming public sector wage and staffing policies, improving financial management, and enhancing municipal autonomy, among others.
