The Federation intends to provide financial support to the federal states and local authorities with a total of around four billion euros up to and including 2029 – with retroactive effect from 1 January 2026. To this end, the Federal Cabinet has passed a draft bill. This is set against a backdrop involving roads full of potholes, childcare facilities and school buildings in need of renovation, and limited service hours at citizens’ service centres: in many cities and municipalities, these are the circumstances citizens are forced to put up with.   

The reason? Many local authorities in Germany are struggling with high levels of debt. According to current figures, the deficit last year was around 32 billion euros.   

Local authorities must be able to act 

As a result, local authorities with poor finances in particular have problems investing enough money in infrastructure and voluntary services that are intended to benefit the public. The federal states are responsible for funding local authorities. However, it is important to the Federal Government that local authorities are able to act and invest locally.   

This is because it is at local level that people get a sense of whether the state is functioning and whether roads, schools and childcare facilities are in good order. To ensure success, the Federal Cabinet has passed a draft bill to ease the burden on the federal states and their local authorities.  

The support consists of three elements: 

• 250 million euros a year go to non-city federal states with poor finances. The aim is to support them in servicing old local authority debts. Specifically, the exceptional burden resulting from excessive local authority liquidity loans are to be offset.   
• The Federation is providing around 350 million euros a year to relieve the East German states of pension payments from the pension system of the former GDR. Their share of reimbursements for pension insurance expenses will fall from 50 to 40 percent between 2026 and 2029.  
• The federal states with strong finances will receive a total of around 400 million euros annually. This is due to the fact that they have to bear the costs of supporting financially weaker federal states within the federal state financial equalisation system. To finance this, the Federation is reducing the sales tax deductions that it levies on federal states with strong finances.   

The draft law represents the fair distribution of tasks and funding between the Federation, the federal states and local authorities. One thing is clear: local authorities with sufficient financial resources and a well-functioning community strengthen our democracy. 

Further support from the Federation

In this legislative period, the Federal Government has already taken numerous measures to reduce the burden on the federal states and local authorities. The federal states have 100 billion euros at their disposal from the special fund for infrastructure and climate neutrality. The federal states can use this money flexibly, including for investments in the infrastructure of their local authorities.   

In addition, income shortfalls from the immediate investment programme are largely borne by the Federation. Local authority revenue shortfalls of around 13.5 billion euros are in fact being absorbed in full by adjusting the fixed amounts for VAT.