Financial resources and scope for action of rural municipalities

Background and Objective

The financial situation of municipalities in Germany is characterized by great differences. While financially strong municipalities are experiencing sustained revenue growth, financially or structurally weak municipalities are often caught in a debt spiral and the provision of public services in sufficient quantity and quality for citizens is threatened. These disparities in resources and burdens are directly felt by the inhabitants of highly indebted municipalities, for example through the postponement of investment projects, the closure of public facilities or the increase in property tax rates and fees. As a result, there is a risk that existing disparities will be further exacerbated.

The discussion about financially weak municipalities is often equated with a discussion about rural municipalities as a whole. But there are also numerous prospering rural municipalities. Urban areas are similarly heterogeneous. Large cities such as Hamburg, Munich or Frankfurt am Main are prospering. In contrast, the financial situation in major cities in the Ruhr region, for example, is precarious due to the effects of structural change. 

Municipalities play a central role as an administrative level in Germany. In 2021, they accounted for 286 billion euros or around 21% of the total expenditure of the core budgets of the federal, state, local and municipal governments. In the same year, 34.5 billion euros, or almost 70%, of public investment in property, plants and equipment, was made at the municipal level. Municipalities can thus be classified as the main providers of investment in tangible assets. In addition, the municipal level is the place where citizens can come into direct contact with politics. Politics is tangible and observable there, and low-threshold participation is possible.

This project aims to identify economic, political and social developments at an early stage that have an impact on the financial situation and the ability of municipalities to act and to identify their causes. Among other things, the research focus is on revenues and expenditures as well as the level of indebtedness of municipalities. In addition, we deal with the municipalities as the lowest administrative level, their degree of autonomy and their options for action. On the basis of our analyses, we aim to formulate policy-relevant recommendations for action that are appropriate to the target group.

Approach

In this project, we first conduct a revenue-side analysis at the district level. In particular, we examine the relationship between the degree of agglomeration as an indicator of rurality and the most important sources of tax revenue for the municipalities.

In a further step, we examine the relationship between the investment activity of the municipalities and the degree of agglomeration on the expenditure side. In doing so, we take into account various other factors for the differences in municipal investment levels. We want to clarify whether the municipalities are able to achieve the politically set goals with the currently practiced form of tax distribution and whether it stands up to scrutiny from an economic point of view. In particular, distributive justice and fiscal need equalization as well as incentive effects will be examined. Empirical studies will examine the specific additional needs of rural areas, e.g. for the provision of network infrastructure. Similarly, in-depth analyses will be carried out on the effects of current trends in municipal development, such as greenhouse gas neutrality or the digitalization of the economy and administration, on the task, revenue and expenditure side. In the sense of ongoing structural reporting, a nationwide set of financial indicators could stabilize the monitoring of regional disparities in municipal finances.

The empirical design of the project includes quantitative methods in particular. Depending on the research question, time series and/or cross-sectional analyses as well as instruments of spatial econometrics, are applied. Literature and document analyses complement and deepen the quantitative findings. In addition to socio-economic and spatial structural conditions, institutional factors are thus also taken into account.