Municipalities at the limit. KfW Municipal Panel 2020 shows: It’s not a minute too soon for an economic recovery programme

• Backlog of municipal investment has grown to EUR 147 billion
• Falling revenues and rising expenditures jeopardise investment
• Coronavirus crisis is expected to drive digitalisation

The coronavirus crisis is putting a strain on Germany's cities, communities and rural districts as their revenues decrease and expenditures rise. The surveys conducted as part of the KfW Municipal Panel 2020 have revealed that 90% of municipalities are pessimistic about their finances for the current year and 80% feel the same about 2021, mainly because their tax revenues are falling. Half of them expect higher expenditures in all relevant categories but investment.

The Chief Economist of KfW, Dr Fritzi Köhler-Geib, commented on the situation of the municipalities: “There is reason to fear that municipalities are reducing their investment expenditure because they can defer them for the time being, unlike mandatory expenditure such as welfare benefits. But that would deliver a fatal blow to a sustainable recovery after the coronavirus crisis because municipal investment is an essential lever, for example in the areas of climate action, education and digitalisation.”

That is bad news for municipalities’ infrastructure in particular, given that they were already unable to realise a considerable volume of necessary investment in the past years. According to the KfW Municipal Panel 2020, the perceived backlog of investment across the nation is EUR 147 billion, EUR 9 billion higher than in the previous year. It continues to be highest in schools (+3% to EUR 44.2 billion), roads (+3% to EUR 37.1 billion) and public administration buildings (-8% to EUR 12.9 billion).

The backlog of investment in municipalities has increased although they have succeeded in raising investment again – from a planned EUR 34.7 billion in 2018 to a planned EUR 35.9 billion in the survey year 2019. However, only part of this amount actually benefited infrastructure. For one thing, construction prices are a driver of the increase. For another, 80% of municipalities, communities and rural districts surveyed by the German Institute for Urban Affairs responded that they were not able to realise all planned investment expenditure, partly because they lacked the necessary building and planning capacities.

The KfW Municipal Panel illustrates yet again that around half the municipal investment is financed from freely disposable budget funds such as tax revenue and transfers under the municipal fiscal equalisation system. These revenue sources have been affected most severely by the crisis. “Our surveys show that almost all municipalities expect a revenue problem which will adversely impact their investment plans. Stabilising municipal finances is therefore a matter of urgency to secure municipal investment. ”It’s not a minute too soon for the relief measures which now have been adopted by the government coalition as part of the economic support package ”, added Köhler-Geib.

The importance of this investment for Germany's competitiveness and quality of life is also evident in the area of digitalisation. Municipalities are called upon to act directly and in multiple ways, for example by providing IT equipment for schools and e-government services for residents. Not least, municipal administrations need to have the necessary technical and human resources to implement all of this. A 91 per cent majority of municipalities expect the coronavirus crisis to boost digitalisation. However, the results of the KfW Municipal Panel also show that while most municipalities see the need to invest in digitalisation, financially weak municipalities spent around 25% less on digitalisation in 2019 than other municipalities. The problem of regional disparities is thus evident in important future issues as well. “This shows that ensuring municipal investment in digitalisation is not just an element of an effective crisis policy but a key building block in future-proofing our country”, summarised Köhler-Geib. “Municipalities will continue to have plenty of needs and more than enough challenges to meet them in the future. The message of the economic recovery package adopted last night, which should make a significant contribution to supporting local authorities in their investments, is therefore all the more important.”

The current KfW Municipal Panel can be downloaded from www.kfw.de/kommunalpanel (only in German available).

The database:
The KfW Municipal Panel is an annual survey conducted by the German Institute for Urban Affairs (Difu) on behalf of KfW Group since 2009. The representative survey is directed at the municipal treasuries of cities with district status, regional districts and district towns with more than 2,000 inhabitants and covers the core areas of municipal finances, investment activity and its funding. The main survey for the KfW Municipal Panel was started in September 2019, and a supplementary survey on the impacts of the coronavirus crisis followed in April 2020.