The 2026 KfW Municipal Panel shows a pessimistic mood among municipal treasuries, which for the second consecutive year must absorb a record deficit. As a consequence, investment activity is stagnating and the investment backlog is rising markedly. Investment plans provide a ray of hope, however, as one in five municipalities is already planning additional investments for the current year financed through the special fund, and overall investment plans are unusually high. This year's special topic sheds light on municipal shareholdings in public enterprises. Municipalities mainly support their municipal utilities in the heat transition and climate transformation by providing guarantees and foregoing profit distributions. However, the financial viability of public enterprises varies widely between sectors.

The gap between planned and realised investments is now a well-documented phenomenon. It is due in part to non-financial investment barriers that delay or block projects altogether. These barriers include complex approval and awarding procedures, extensive building regulations and staff shortages at building authorities. It is good that the Federal Government is in the process of clearing some of these barriers.

The financial position of municipalities has continued to deteriorate noticeably, and the mood in the treasuries is gloomy. The Special Fund can have a stabilising effect on municipal investment activity. But that will not be sufficient to turn the budget position around. What are needed are structural reforms so that municipalities’ financial resources align with their functions again. One option for improving municipalities’ situation would be to modify the distribution of tax revenues between the federation, the state and the municipalities.

Dr Dirk Schumacher