KfW municipal survey: Slump in revenues expected, investment under pressure

• 90% of cities, municipalities and rural districts are pessimistic about their budget situation
• Falling revenues and rising expenditures are reducing financial scope
• One in three municipalities to cut back investment

A new survey of 200 municipalities conducted as part of the KfW Municipal Panel 2020 has revealed that the coronavirus crisis will mark a sharp turning point in the positive development of the budgets of cities, municipalities and rural districts in the past years. Instead of budget surpluses and falling debt levels, most local governments now expect falling revenues, rising expenditures and a renewed increase in debt levels. Ninety per cent of the municipal treasurers surveyed hold a pessimistic view of the current year, and eight in ten municipalities expect their budget situation to deteriorate in 2021 as well.

The current survey of the impact of the coronavirus pandemic on the budgetary situation is not representative but provides a robust impression of how municipalities are being affected. On the revenues side, 42 % of municipalities expect a sharp drop while a further 53 % predict a gradual decline in revenues. This is primarily due to decreasing tax revenues, which 63 % of municipal budget directors are forecasting. The treasuries believe the current crisis will have significant effects beyond the current year. One fourth expect revenues to decrease noticeably in 2021 as well.

Cities, municipalities and rural districts are also pessimistic about the expenditure side. Half of them predict rising expenditures not just for 2020 but also for the following years in all relevant expenditure categories except investment. Around 70 % of the treasuries expect rising social benefit payouts. Treasurers believe rising expenditure on materials, equipment and staff will put substantial pressure on budgets.

According to the KfW survey, around one in four municipalities are responding to the situation with short-term spending freezes, and one third are preparing supplementary budgets in order to address the financial consequences of the coronavirus crisis. This is likely to drive a similar share of municipalities into higher debt. Most municipalities (63 % of survey respondents) also expect to put budget consolidation plans in place.

In total, one in three municipalities assume that their investment expenditure this year will decrease or plummet. This view is no different in the medium-term outlook from 2021 either. Municipalities already had considerable problems realising investments to the necessary extent in the past. Evidence of this is the high backlog of municipal investments which KfW Research and the German Institute for Urban Affairs identifies annually in the KfW Municipal Panel. In the year 2018 it was EUR 138 billion. The current analysis for the year 2019 is ongoing and will be available in June.

“Municipalities already had high investment requirements before the coronavirus crisis”, said Dr Fritzi Köhler-Geib, Chief Economist of KfW. “We face a catastrophic prospect if their budgetary scope now shrinks and investments are therefore put on hold. Germany needs public investment in modern infrastructure in order to overcome the consequences of the crisis and as a prerequisite for maintaining the country’s prosperity. Adapting the infrastructure to climate and demographic change alone is a Herculean task.”

What gives reason to hope is that even so, 26 % of municipalities expect rising investment to be possible in the coming years if policymakers can put in place support measures for municipalities – above all by reducing financial burdens, something that 49 % regard as necessary to overcome the crisis. Every second municipalities expect a shift of investments within budgets in favour of "system-relevant" areas such as healthcare and disaster control in the municipalities.

The current municipal survey by KfW Research on the impact of the coronavirus crisis is available at www.kfw.de/kommunalpanel (available in German only)

Details about the database:
For the current analysis, the German Institute for Urban Affairs surveyed municipalities on behalf of KfW Research between 23 and 30 April 2020 on the impact of the coronavirus crisis on their budget policy. At the end of May 2020, 200 participants from municipal treasuries completed the questionnaire. Of the participating municipalities, 69 % were towns and municipalities belonging to a district, 11 % were cities with district status and 20 % were rural districts. The majority of 32 % were southern German municipalities of Bavaria and Baden-Württemberg, while 15 - 20 % each were municipalities of other federal states. Most towns have between 5,000 and 20,000 inhabitants. The survey is therefore not statistically representative, but it does reflect a robust picture of how municipalities are being affected.