The federal government plans to provide financial support to municipalities burdened with excessive debt. The Federal Cabinet is expected to approve a draft law on Wednesday that will allocate approximately one billion euros annually to cash-strapped cities and towns, the Federal Ministry of Finance announced on Tuesday. The support is limited to the period until 2029 and will be retroactive to January 1, 2026. The draft law implements an agreement from the coalition agreement.
Many cities and towns in Germany are groaning under a heavy debt burden. They complain that this results in a lack of funds for infrastructure and services that are meant to benefit citizens. For a long time, municipalities have been demanding relief from the federal government – arguing, in part, that some of their expenditures stem from laws passed by the federal government, the subsequent costs of which the municipalities must bear.
The aim of the new law is now to “make the lives of citizens and their daily routines better and, in many respects, easier,” according to the SPD-led Federal Ministry of Finance. According to the Basic Law (Germany’s constitution), the states are actually responsible for the financial affairs of municipalities. This also places “the responsibility on the states to relieve their municipalities of excessive debt,” the ministry stated. Nevertheless, the federal government intends to support the states in financing their responsibilities.
Of the one billion euros that the federal government provides annually, 250 million go to financially weak states to help them service their existing municipal debt. North Rhine-Westphalia is slated to benefit the most, receiving more than 164 million euros annually.
North Rhine-Westphalia has a particularly high number of heavily indebted municipalities. Last year, the state’s Debt Relief Act came into effect there. It stipulates that the state will assume a total of 8.9 billion euros of debt from 167 particularly indebted municipalities. The North Rhine-Westphalia Association of Cities and Towns had already criticized the planned federal aid as “little more than a drop in the ocean.”
The federal government plans to contribute an additional €350 million annually until 2029 to relieve the burden on eastern German states for pension payments originating from the former GDR’s social security system. Previously, the federal government and the affected states shared these costs. Going forward, the federal government will cover 60 percent of the costs, and the states 40 percent.
The new law also provides relief for the financially stronger states, which support the weaker states through the system of fiscal equalization. These payments have long been a thorn in the side of Bavaria, the main contributor to the system, and the Bavarian state government has already filed a constitutional complaint against the equalization scheme.
The federal government is now offering the contributor states approximately €400 million per year. This amount will be used to reduce the value-added tax (VAT) deductions it levies from the financially stronger states.
AFP translated by Blackout News