Financial emergency: German local authorities cut back on services and increase taxes
The economic crisis has hit the German local authorities with full force. The revenue of the German local authorities will decrease considerably in 2010. For 2011 only a slight increase – if at all – is foreseeable. At the same time, expenditure is increasing - despite local authorities’ savings efforts.
The outcome: Every third local authority is not able to present a balanced budget, and the level of debit in towns and communities is increasing. Sixty percent of the local authorities are now planning to reduce community services. And 84 percent of local authorities propose to increase or implement fees and taxes. Those are the results of a study by the auditing and consultancy company, Ernst & Young, which is based on a survey of 300 German local authorities.
The majority of German local authorities (68 percent) describe their own financial situation as poor or very poor. Every third German local authority even had to adopt a budget consolidation concept for the year 2010 – that is to say: Local authorities are not able to present a balanced budget and they have to present their financial planning for the approval of the regulatory authority.
Local authorities cut costs and increase taxes and fees
Citizens will be able to feel the financial emergency directly: through higher fees, closures or reduced opening times of public facilities or also thinned-out local traffic. Local authorities want to save, in particular, in the areas of street lighting (31 percent) and youth and senior citizen support (29 percent). In many cases, swimming baths are also being closed (14 percent) or there are to be restrictions in local transportation or with the day-care centre opening times (11 percent).
Local authorities are hoping for additional revenue from increases in fees or taxes. Almost every second local authority (48 percent) is planning to increase the local tax collection rate. In future, higher entry fees will become due in 44 percent of local authorities for visits to the swimming baths, theatres and museums. Every second local authority wants to increase day-care centre fees (32 percent), and many local authorities also plan to increase dog licence fees.
“Mayors and Chambers are currently thinning down their budgets in all areas with regards to savings potentials,” observes Hans-Peter Busson, partner with Ernst & Young. “Now it’s about increasing revenue and reducing expenditure at the other side. That will be painful for citizens, but there isn’t any other solution as the level of debt in most local authorities is already far too high, says Busson. In his opinion, this development will be reinforced even further: “If anything, many local authorities shy away from all-too-harsh cuts with local authority services and restrict themselves to just looking to increase fees.” In future, local authorities would have to consider even tougher measures, states Busson: “In many regions in Germany, public faculties have to be adapted, as a matter of urgency, to demographic development. This can also mean: Reducing services considerably or doing away with them altogether. Local authorities must be clear about what they can and cannot afford – because a clear improvement of the situation is not in sight in many places.”
Fewer investments – particularly in road construction
Many local authorities currently do not feel they are in the position to make the necessary investments in road construction on an urgent basis. So, sixty-eight percent of local authorities specify that they are currently stretching maintenance measures for streets and buildings. Sixty-one percent of local authorities are reducing new investments in road construction and urban development. The outcome: “Streets in need of refurbishment are only being tentatively patched up, school buildings are being maintained to an unsatisfactory level, the investment backlog is becoming bigger and bigger,” comments Busson.
The capital expenditure of the German local authorities is expected to drop further this year: Forty-six percent want to invest less in 2010, only 26 percent want to increase capital expenditure – despite additional funds from the Konjunkturpaket II (economic stimulus package), which is still to be spent in 2010.
The planned cuts are necessary as a considerable improvement of the situation is not expected for the near future: After the business tax revenue of the local authorities had decreased by 20 percent in 2009, the majority of local authorities – 59 percent – estimated a further drop in the current year. It is not supposed to be until 2011 that we will see a reversal of the economic recession: Thirty-five percent of local authorities hope that business tax revenue will increase again in 2011, however 29 percent still expect a further drop. Local authorities from East Germany are particularly pessimistic: Only five percent predict an increase in business tax revenue in 2011, 38 percent see a further drop. Also, the local authority portion of the income tax - in the opinion of local authorities - will not make a contribution to the financial recovery of local authorities for the present – in contrast: Seventy-nine percent of local authorities expect a decrease in revenue for 2010. And also in 2011, in the opinion of those surveyed, revenue will decrease by trend: Forty percent expect a further drop, only 29 percent are hoping for an increase in revenue.
“Germany’s towns and communities are so far in debt, like never before in the history of the Federal Republic of Germany,” states Busson. “And the local authorities in West Germany are banking on the economic recovery bringing about increasing tax revenue, at least in the medium-term, and local authorities in East Germany can’t see any light at the end of the tunnel.” Structural problems – a declining population, high unemployment rate, low economic substance – all hinder the financial recovery of towns and communities in the Federal States in Eastern Germany.
While the revenue of the local authorities is continuing to decrease at present, local authorities are faced with higher expenditures: in particular, social spending – e.g. accommodation costs for the long-term unemployed and expenditure for youth support - which have been increasing sharply for years - will reach new record levels in the coming years in the opinion of local authorities: Seventy-three percent of local authorities are expecting a further increase – only three percent are banking on lower expenditure. Local authorities cannot cut back here, as these social expenditures are governed according to federal or state laws. Also, staff expenditure will continue to increase, in the opinion of the majority of towns and communities (64 percent) – despite planned job cuts of 61 percent of the local authorities.
Reform of council tax necessary
“The financial situation of the German local authorities is catastrophic,” Busson summarises the situation. “The outcome will be a continued increase in debt with the local communities. Many German towns are fundamentally bankrupt. They will not be able to solve the debt crisis internally – because the social expenditure is continuing to increase and the saving potentials are already exhausted with the particularly hard-hit local authorities,” establishes Busson. A sustainable reform of council tax is urgently required. “Local authorities have, in the meantime, lost a large portion of their autonomy, their options for action are extremely limited. They need more freedom of design and have to be able to make their own concrete decisions on their income and outgoings.”
Also the local authorities are certainly obliged, states Busson: “Local authorities are required to continue working on the trimming down of the administration structures, optimising their operating processes and checking their service offer.” In addition, a stronger cooperation amongst the local authorities is urgently demanded. Busson sees a lot of potential here, e.g. with the IT infrastructures, with real estate management, with the mutual sourcing or with internal services such as auditing. “Also, drastic measures such as the merging of small local authorities are not to be taboo,” claims Busson.
(Ernst & Young Auditing Company of 1 July 2010)
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