Germany: Local governments face financial collapse

It wasn't so long ago that Weissach, a half-hour drive from Stuttgart, was the richest local authority in Germany. The small town in southern Germany is home to 7700 people and the development center for luxury carmaker Porsche. The municipality benefited from the company's billion-dollar profits via trade taxes, which flowed into its budget.

In 2009, Weissach collected €20,000 ($23,000) in taxes per inhabitant. "Thanks to Porsche, in Weissach we have the highest per capita tax revenue in all of Germany," remarked then-mayor Ursula Kreutel gladly in 2011 at the opening of an extension of the Porsche facility.

Families wanting to build a house in Weissach received a €10,000 construction bonus per child from the council. A four-level library was built, a concert piano costing €100,000 was bought; there were subsidies for private music lessons. Most of the money, however, was put in the bank to provide a buffer for hard times, Kreutel promised.

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The hard times have arrived. Germany's automotive industry is in the deepest crisis of its history. At Porsche alone, profits tumbled about 96% in 2025. Other industries are also struggling. The tax revenue the municipalities greatly relied on has dropped rapidly. Even once prosperous cities and towns can no longer cover their expenses.

"The finances of the local authorities are in a dramatic free fall," said Ralph Spiegler, President of the German Association of Towns and Municipalities (DStGB) and himself mayor of Nieder-Olm in Rhineland-Palatinate.

In Germany, powers and responsibilities are divided among the federal, state and local governments. Local authorities are responsible for many aspects of daily life and, therefore a considerable portion of government duties. That ranges from trash collection to water supply, schools and kindergartens, firefighting, sport and culture, and most social benefits.

Cities and municipalities spent a total of €400 billion in 2024, according to the German Federal Statistical Office (Destatis). That is forecast to increase in 2025 due to rising personnel and energy costs. The biggest cost drivers are social benefits. "We are talking about a tripling in the past 20 years, without coming remotely close to the funding to match it," DStGB President Spiegler explained. The costs for child and youth services, care services and integration support for people with disabilities alone were about €38 billion in 2007 and have risen continually since then. In 2027, these services are estimated to cost more than €102 billion.

The integration of refugees and migrants who have been granted the right to remain in Germany is also a challenge. Schools, language and integration course providers, employment offices and especially immigration offices are being stretched to their limits. The German Association of Towns and Municipalities advocates a new way to split the costs of social services: For federal, state and local governments to each contribute a third of the required financing in future.

In addition, the local authorities want to be involved in the lawmaking process. Currently, the federal and state governments make laws. "This way, not only the financial burden but also the responsibility for reforming social services would be distributed across all levels of government," Spiegler said.

Others are taking it even further. In November 2025, the mayors of all 16 German state capitals made an appeal to the federal government. Their demand: Every law which would impose future costs on local municipalities should also include a plan to fully compensate them from the outset. According to the principle: "Whoever orders it, pays for it."

Of total annual spending of federal, state and local governments, about 25% of the costs are for the responsibilities of the cities and municipalities — and that is trending upwards. "But the local government receive only 14% of the total tax take," calculates Spiegler, speaking of an "imbalance."

The deficit in local government coffers is growing from year to year. "We have raised the local taxes (land taxes and local business taxes) to the limit of what people can tolerate," said Spiegler. Savings and cuts have been widespread; building projects have been halted, and cultural and community initiatives have been put on ice.

According to the Association of Towns and Municipalities, investing in the future is no longer possible. They are already lacking money for the maintenance and renovation of existing buildings. An estimated €218 billion is needed to repair schools, town halls, kindergartens, swimming pools, bridges, and streets.

Because cities and municipalities are not allowed to take on long-term debt for ongoing costs such as personnel, heating and energy, they take out short-term bridging loans daily. However, these are very expensive.

Germany's state and federal governments are well aware of the financial problems local governments are facing. "We must help the municipalities," German Chancellor Friedrich Merz of the conservative Christian Democrats (CDU) said in early November regarding social services. However, those same state and federal governments are struggling with their own budgets amid Germany's economic crisis.

German Finance Minister Lars Klingbeil, of the center-left Social Democrats (SPD), announced relief measures for local governments in December but did not provide specific details.

This article was originally written in German.

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