Municipalities breathe a sigh of relief

The majority of municipalities reported a good or even very good budget situation in the KfW Municipal Panel 2019. However, the surveyed treasuries are significantly more sceptical about their future financial position. In an interview with KfW Stories, KfW economist Dr Stephan Brand provides an insight into the key results of this year's survey.

About Mr Brand

Dr Stephan Brand has been working at KfW since 2015. As a senior adviser in the Economics Department, he works for KfW Research on the topics of municipalities and infrastructure.

How would you assess the current financial situation of the municipalities?

DR STEPHAN BRAND: Generally speaking, the current financial situation of the municipalities is good. We have seen clear budget surpluses for several years now. This applies to the majority of municipalities but not to all. Some municipalities are still unable to balance their budgets. Budget deficits have reduced, but they still remain and limit the scope for action.

That still portrays a fairly positive mood in most municipalities. So why is there such a high backlog of investments?

When we talk about the investment backlog, we are referring to a development that began many years ago. A few good years like the ones we are experiencing are not enough to solve this problem. It is true that we have been seeing an increase in investment for several years now. But what is lacking, for example, are the administrative staff that are necessary to invest the money that is available. Municipalities have laid off many workers in the past decade and are now facing organisational challenges.

KfW Municipal Panel

Municipalities were surveyed by the German Institute for Urban Affairs on behalf of KfW for the first time in 2009 to gain an overview of their financial position, investment activities and financing conditions. The KfW Municipal Panel has since been published annually and established itself as a source of reference in economic-policy debate.

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Does that also explain why it is now taking so long to clear the backlog of investments?

Exactly. Last year around one third of the planned investments could not be realised. Not only did the treasurers report a lack of personnel needed to implement projects at the desired pace. Capacity shortages in the construction industry are another important issue. The ongoing construction boom means workers are in short supply. Municipal contracts have to compete with those from businesses and private customers, and they do not always win. Rising prices and high capacity utilisation in construction prevent municipalities from being able to implement necessary investments for the foreseeable future.

Are there any regional differences?

Germany has many municipalities, and many factors influence municipal budgets. Some municipalities benefit from their location, others not so much. What is also important is how the states support their municipalities. We have 13 large states and each of them handles this slightly differently. And, of course, the municipalities themselves also need to operate efficiently. So the answer is yes. The many factors which municipalities can only partly influence lead to strong regional differences which remain even in good economic times.

Can you estimate how the figures will develop in the coming years?

The hope is for the municipalities to remain on the path they have embarked on. We can see from treasurers' figures that the need to catch up in areas such as schools and child daycare centres, for example, has been recognised and the investment backlog is falling. But it is also becoming apparent that expectations for other areas such as roads are rather subdued. If we look at the assumptions for the future financial position, we can see a very clear downturn for the first time since 2010. This is in line with the muted economic forecasts but does not mean we will in fact directly slip into deficits. But it is possible that the municipalities will have less financial scope again in the coming years. What that ultimately means for investment activity is something we will only be able to see from the new figures of the next KfW Municipal Panel.

Published on KfW Stories: Tuesday, 20 August 2019