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IW-Trends No. 3 22. July 2019 Martin Beznoska / Björn Kauder Debt and Investments of Municipalities in Germany

The financial situation of many municipalities in Germany has deteriorated considerably over the past 20 years. Not all municipalities have been able to cope with structural change, the 2009 financial crisis, migration and the demographic transition within the limits of the resources available to them.

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Debt and Investments of Municipalities in Germany
IW-Trends No. 3 22. July 2019 Martin Beznoska / Björn Kauder

Debt and Investments of Municipalities in Germany

IW-Trends

Martin Beznoska / Björn Kauder German Economic Institute (IW) German Economic Institute (IW)

The financial situation of many municipalities in Germany has deteriorated considerably over the past 20 years. Not all municipalities have been able to cope with structural change, the 2009 financial crisis, migration and the demographic transition within the limits of the resources available to them.

This article examines the borrowing and investment activity of local governments at the level of Germany’s federal states. Between 2001 and 2018 so-called “cash advances” came to play an increasingly important role in the Saarland, Rhineland-Palatinate, North Rhine-Westphalia and Hesse. This happened despite the fact that these borrowing facilities are actually only intended to provide liquidity for local administrations with fluctuating revenues and expenditures. Overall, local government investment is trending sideways with only relatively moderate declines. While there is hardly any correlation between other forms of municipal debt and investment activity, a high level of cash advances is accompanied by a low rate of investment. This suggests that in the long term municipalities heavily burdened with this type of loan are likely to run into even greater financial difficulty. Potential solutions to the financial crisis facing many municipalities would involve state governments assuming the cash advances of highly indebted municipalities and establishing a local government investment programme. However, the states’ restricted scope of action, to which the debt brake, which forbids them to take on new structural debt, is contributing, threatens to limit the resources available for either debt relief or investment support.

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Debt and Investments of Municipalities in Germany
IW-Trends No. 3 22. July 2019 Martin Beznoska / Björn Kauder

Martin Beznoska / Björn Kauder: Verschuldung und Investitionen der Kommunen in Deutschland

IW-Trends

Martin Beznoska / Björn Kauder German Economic Institute (IW) German Economic Institute (IW)

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IW-Report No. 48 10. November 2026 Martin Beznoska

Public Preferences Regarding Government Spending and Taxes

This study examines public preferences for government spending and taxation using a fully randomised paired conjoint experiment in the 2025 IW-Population-Survey.

Martin Beznoska IW

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IW-Report No. 41 12. October 2026 Björn Kauder

A Comparison of Public Revenues Across the Federal States

To ensure equivalent living conditions, the federal government influences the revenues of the states and municipalities. Under the fiscal equalization system, financially weak states receive surpluses in the distribution of sales tax revenues, while financially strong states must accept shortfalls.

Björn Kauder IW

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