2.1 Local government finances
Local governments (core budgets and off-budget entities) closed the first half of 2024 with a very large deficit of €17 billion. It by far exceeded the level recorded for the same period one year earlier, namely by €10 billion.
The statistical reclassification of local public transport companies further boosted revenue and expenditure, but is unlikely to have significantly affected the balance. 7 Since the second quarter of 2023, local public transport companies pertaining to local government have been classified as off-budget entities in the general government sector (i.e. no longer in the corporate sector). Given that they did not yet count as part of the general government sector for the entire first half of 2023, the corresponding government revenue and expenditure items rose sharply on the year. This statistical effect mainly affects off-budget entities. To eliminate this effect, this commentary focuses on core budget developments.
Revenue in the core budgets increased by just under 3½% (+€5 billion) on the year in the first half of 2024. Tax revenue stagnated, however. Although the large revenue item local business tax (after deduction of shares accruing to other government levels) still rose by 3% (+€1 billion) on account of a stronger development in the first quarter, income tax shares, on the other hand, fell sharply, by 9% (-€1½ billion). This was due to their excessively high level in the year prior, when relatively high back payments were settled in the first half of the year. 8 The major item general purpose grants from state government grew moderately (+2½% or €½ billion). Growth had been significantly higher one year earlier, given that state governments’ tax revenue, on which the grants are largely based, had previously expanded a great deal more sharply. The increase in revenue from fees was somewhat more dynamic, at 4½% (+€½ billion), Local governments evidently increased their fees, not least due to higher costs. 9
At 9% (+€14 billion), the rise in core budget spending was considerably more pronounced than the increase in revenue. This is probably a reflection, not least, of higher prices. Spending on personnel likewise rose by 9%, contributing almost €3½ billion to the increase in expenditure. The sizeable wage agreement of last spring had so far only made a minor impact in the first half of 2023. At 7% (+€2½ billion), other operating expenditure posted only somewhat weaker growth. The increase in expenditure on social benefits of just over 12% (+€4½ billion) was particularly strong, with contributions from all larger sub-categories such as integration assistance, social assistance, assistance for young people and accommodation costs (basic allowance benefits). Fixed asset formation saw a below-average increase of 6% (+€1 billion). The considerably poorer financial situation since last year may already have had a dampening effect in this context.
Local government can expect a higher deficit for the year as a whole as well (2023 deficit for core budgets and off-budget entities: €7 billion). This is because expenditure growth is likely to remain high in the year as a whole, irrespective of less dynamic increases in the major item personnel expenditure from the summer onwards.
Pressure on local government finances is set to subside to some extent in the years that follow, but a fundamental recovery is currently not in sight. There is likely to be solid growth in tax revenue going forward, even when taking account of revenue shortfalls stemming from the growth initiative as laid out in the draft legislation. In addition, it remains to be seen how the changeover to the new real estate tax – which is structured differently from state to state – will play out. On the one hand, legal objections have been raised, which is indicative of default risk. 10 On the other hand, local governments are able to raise multipliers in order to generate additional revenue from real estate tax to close fiscal gaps. 11 Growth rates on the expenditure side are likely to decline significantly as price pressures resulting from the high rates of inflation over the last few years are set to subside. As a result, the pressure on local government finances is likely to ease in some areas. However, local governments are facing political challenges requiring additional expenditure as well. Examples include the further expansion of childcare and local public transport facilities, and urban planning measures for adapting to climate change. Consequently, a significant easing of the financial situation is not foreseeable at present.
It is essential that political challenges are not resolved at the expense of sustainable local government finances. The federal states must prevent a renewed increase in multi-year local government cash advances. 12