Cities and municipalities in Germany have less and less money left for investments, while the share allocated to social services and administration has meanwhile risen to around 60 percent of their budgets. This is according to recent analyses by the German Economic Institute (Institut der deutschen Wirtschaft / IW) in Cologne, which sees the federal and state governments as primarily responsible for this development. In the 30 years from 1992 to 2022, for example, the share of social spending – such as for childcare or social assistance – increased from 25 percent to almost 38 percent (2022). The share of administrative costs has also risen sharply and now accounts for around 20 percent of the municipal budget, according to the institute. At the same time, the share allocated to infrastructure measures such as road construction, sewage and waste disposal has fallen from 34 percent to just 20 percent.
According to the IW, one of the main reasons for this is expenditure that is determined by the federal government but has to be borne by the municipalities, such as the legal right to childcare or higher social welfare benefits. This is clearly evident in inflation-adjusted per capita expenditure. For example, social and youth welfare costs, over which local authorities have a limited influence, rose from €759 in 1992 to €1,675 in 2022. At the same time, administrative costs per capita have more than doubled from €375 to €923. Against this backdrop, there is hardly any money left for tasks such as road construction or housing, which local authorities can decide on themselves. In 2022, only one in five euros from local authority budgets went to such projects; in 1992, it was one in three euros. There has also been a significant decline in capital expenditure, which fell from 21 percent to 12 percent, further increasing the investment backlog. At the same time, the municipal deficit reached a new record high of almost 25 billion euros in 2024.
IW financial expert Björn Kauder said: “Citizens are now paying for the expansion of social services over the past decades with broken roads and dilapidated schools.” The federal and state governments must provide municipalities with sufficient financial resources so that investments are not neglected. At the same time, there is considerable potential for savings in cities and municipalities, particularly through more efficient administration.
“The IW figures clearly illustrate a dramatic undesirable development and show how necessary more efficient administrative structures and appropriate regulation of municipal finances are. Above all, however, it becomes apparent that tasks such as the long-term maintenance and expansion of our infrastructure and construction cannot be realized without private investment. There are a large number of projects and tasks here that could and should be taken on by private investors under fair and reliable framework conditions,” says Jacopo Mingazzini, CEO of The Grounds.
