Municipal finance

German municipalities are heading for a record deficit this year, as communities are buckling under rising costs for a range of benefits, according to the German Association of Cities.

The German Statistics Office released figures on Tuesday that show towns and cities spent 7.8 billion euros more than they earned in the first half of this year, compared with a deficit of just 4.2 billion in the first half of 2009.

Structural deficit

"The government pushes through all kinds of new regulation in terms of benefits," Monika Kuban, deputy director at the German Association of Cities told Deutsche Welle.

"They are, of course, useful, but with new initiatives, like nurseries for children under the age of three for example, it's almost impossible to judge the costs for the local authorities," she said.

Kuban points out that, in the last 20 years, costs for benefits for the elderly, housing or the disabled have doubled, with the total amount expected to shoot up to 42 billion euros this year.

Since 1998, for example, costs for creches have gone up by 4.5 billion euros to 14.5 billion euros. People are also getting older and that demographical change is reflected in higher costs for benefits being handed out, for example to people who cannot live on their pension alone.

"It's not just the financial crisis that has hit us hard, it's demographics and new legislation from Berlin that are weighing on our finances. It's a structural deficit, not just a temporary phenomenon," Kuban said.

Trade tax remains controversial

Since the global financial crisis, income from trade tax, which makes up 20 percent of municipal revenue, has not only declined because of the dire economic situation.

"Of course, our situation has been affected by the global crisis, but 50 percent of the decline in trade tax is down to legal changes aimed at helping companies weather the storm," Kuban told Deutsche Welle.

The trade tax, which has to be paid by all businesses on top of income tax and corporation tax, is frowned upon in the business world, as it contributes to Germany having the highest corporate tax rates in Europe.

The current governing coalition of Christian Democrats and the business-friendly Free Democrats has called for it to be abolished, but local authorities say they cannot do without it.

"The tax is one of our main sources of revenue. There are few loopholes, which is why businesses don't like it," says Kuban.

"We want to keep it and also extend it to the self-employed, who don't pay it at the moment. As it's enshrined in the constitution, you'd need a parliamentary two-thirds majority to change the law, and parties like the Social Democrats just won't stand for it," she explains.

Kuban is calling on the government to make sure that the federal budget takes on a bigger share of the costs for social benefits to relieve local authorities.

Author: Nicole Goebel
Editor: Stuart Tiffen