Thursday, January 21, 2021
Study on Debt Reduction
The prospects for municipalities are bleak
According to EY experts, cities and municipalities have so far come financially relatively unscathed by the Corona crisis. This is primarily due to the grants. However, the federal and state governments will not be able to permanently plug municipal financial gaps.
The corona crisis is thwarting the budgets of many cities and municipalities and, according to a study, is likely to lead to rising taxes and fees again. Almost two thirds of the larger municipalities in Germany currently have corresponding plans or have already implemented them, as the "Municipal Study 2020/21" by the consulting company EY has shown. In addition, almost a quarter of the cities and municipalities surveyed have recently reduced services for citizens or are planning to do so. In contrast, investments have not been and will not be scaled back overall.
However, many larger municipalities already had plans to increase taxes in 2019 and thus before the outbreak of the pandemic – even more than now. At that time it was 68 percent who levy more taxes and want to make garbage collection, street cleaning and other services more expensive. Now it's 64 percent. At that time, 20 percent wanted to reduce services – for example, close swimming pools and sports halls or cut social offers. Now there are 23. In many places there is hardly any potential for this, it was said.
Overall, according to the EY experts, the cities and municipalities have come through the Corona crisis relatively unscathed financially – which, according to the study, is primarily due to financial aid from the federal and state governments. In 2020, these would have accounted for an average of ten percent of the municipalities' total income.
The income from business tax, for example, has meanwhile fallen by an average of 15 percent. "The long-term consequences of the pandemic for public finances will be considerable," said Bernhard Lorentz, who heads the Government & Public Sector at EY. "And the federal and state governments will not be able to plug municipal financial holes in the long term. All those involved are therefore facing difficult years and further unpopular austerity measures."
Pay off debts on your own?
The "municipal study" is based on a survey of 300 German municipalities with at least 20,000 inhabitants in November. At the time, just under a third of them assumed that they would be able to collect business taxes this year to the same extent as before the Corona crisis. The possible further effects of the current lockdown have not yet been taken into account. 47 percent said they ended 2020 with a budget deficit.
In 2019 only 13 percent said that. "The pandemic has thrown the municipalities back in their efforts to achieve financial recovery years," said Lorentz. According to the survey, every second municipality expects its debt level to increase in the coming years. And one in five does not believe that they can still repay their debts on their own.
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