GERMANY

Germany is a federal parliamentary republic with a federal government and 16 state governments (Länder). Its constitution was adopted on 8 May 1949 and revised in 1990 with the Unification Treaty. The Basic Law of the Federal Republic of Germany (Grundgesetz) was further amended, notably with two federalism reforms (Föderalismusreform I and II) which aimed to improve the assignments of responsibilities (2006) and intergovernmental finance (2009) between the federal and Länder levels. Intergovernmental relations are based on a constitutional principle (Bundestreue). The federation-Länder relationship is grounded on the principle of co-operative federalism and loyalty to the federation. At the federal level, the executive branch consists of a Federal President as head of state and the Federal Chancellor as head of government. Legislative power is composed of two collegiate bodies: The Bundestag and the Bundesrat. The latter reflects Germany's federal structure as it is composed of 69 representatives of the Länder governments, and seat allocation depends on the population of each Land. At the subnational level, Germany has a three-tier subnational government system composed of states, districts and municipalities. Pursuant to the preamble of the Basic Law, the states are the basic political units at the subnational level. Accordingly, they have their own constitution, which must comply with the principles of the Basic Law, as well as autonomous legislative, executive and judicial bodies. Each Land has a parliament (Landtag), elected by direct universal suffrage for a four-year mandate. This legislative body elects the minister-president of the region, who chairs the government. The system differs in the city-states of Berlin, Bremen and Hamburg.

Districts and municipalities are also enshrined in the Basic Law and their status is constitutionally guaranteed (Art. 28). However, each Land determines the status, territorial structure, responsibilities and fiscal framework of local governments in its jurisdiction. At the district level, district councils are elected by direct universal suffrage for four to six years, depending on the Land. The president of the district council is either elected directly by the citizens or elected by the assembly with the approval of the interior minister of the relevant Land. Municipalities in all Länder, except for that of Hessen, are governed according to the “council system”, with a local council elected by direct universal suffrage for a mandate of four to six years depending on the Land. The mayor (Bürgermeister), who is also elected by direct universal suffrage from four to nine years, chairs the local council and heads the municipal administration. In the Land of Hessen, municipalities are governed according to the “magistrate system”.

Since the 1990s, several functional reforms have occurred in order to streamline Länder’s administrative and organisational structure and to reduce public staff spending. These reforms resulted in transfers of competences from the Länder to subnational governments, particularly to districts and district-free cities, and a drastic reduction in the number of municipalities and districts. These reforms varied among Länder. A large administrative decentralisation reform took place in the Land of Baden-Württemberg in 2018, where 350 out of 450 single-purpose administrative units were dissoluted. Their powers and staff were transferred to 35 districts, nine district-free cities and four Lands. By contrast, administrative de-concentration prevailed in Lower Saxony, shifting from a three-tier to a two-tier administration by abolishing meso-level administrative districts with the act of November 2004. Finally, six quasi-regional districts were created by merging 12 existing districts in the Land of Mecklenburg-Vorpommern, following the District Reform Act of 2011. State tasks, including coordination, were transferred to these quasi-regional counties.

TERRITORIAL ORGANISATION
MUNICIPAL LEVEL	INTERMEDIATE LEVEL	STATE LEVEL	TOTAL NUMBER OF SNGs (2021)
10 789 municipalities (Gemeinden)	400 districts (Kreise)	16 states (Länder)
Average municipal size: 7 715 inh.
10 789	400	16	11 205

OVERALL DESCRIPTION: The three-tier system of subnational governments includes a regional level (Länder), an intermediate level (Kreise) and a lower level with municipalities (Gemeinden).

STATE LEVEL: The 16 states differ significantly in terms of area, population size and wealth. There are three city-states (Stadtstaaten) which cover the territory of Berlin, Hamburg and Bremen and combine the functions of states and municipalities. Other Länder are defined as Flächen Länder (regions with a larger geographic size). While the average state population was around 5.2 million inhabitants in 2021, the largest (North-Rhine Westphalia; 17.9 million inhabitants) had 26.5 times more inhabitants than the smallest (Bremen; 0.7 million inhabitants). The five Länder of former East Germany have the lowest GDP per capita of the 16 states (EUR 32 740 per inhabitant in 2021 against a national average of around EUR 40 495). Differences between German regions in terms of GDP per capita have decreased over the last 16 years thanks to the equalisation mechanisms in place in the country. However, regional economic disparities in Germany remain above the median of OECD countries, with Hamburg having 2.23 times higher GDP per capita than Mecklenburg-Vorpommern in 2021.

INTERMEDIATE LEVEL: The 400 districts comprise 294 rural districts (Landkreise) and 106 “urban districts” or “district-free cities” (Kreisfreie Städte or Stadtkreise), with an average size of around 208 100 inhabitants. The reduced number of districts results from subsequent dissolutions that occurred between 2001 and 2016, and more recently in 2021. Urban districts are cities with generally more than 100 000 inhabitants. In 2020, 26.8 million persons lived in urban districts (i.e. almost one third of the German population).

MUNICIPAL LEVEL: There were 10 789municipalities in 2021, a fifth of which were urban municipalities (towns or cities called Städte that have either historic town rights or significant population). The number of municipalities has decreased regularly in recent decades because of municipal amalgamation policies. Mergers were carried out by several Länder in the 1970s (Baden-Württemberg, Hessen, North Rhine-Westphalia), after 1990 in the former East Germany (e.g. in Brandenburg in 2003) and in the Land of Saxony-Anhalt (from 1 012 municipalities in 2008 to 219 in 2012). Overall, the number of German municipalities has decreased from 16 113 in 1990 to the current number (i.e. a drop of 33%). In 2020, the average municipal size was around 7 700 inhabitants (below the OECD average of around 10 250), with high disparities between Länder. In 2020, 52.3% of German municipalities have less than 2 000 inhabitants and 72.63% have less than 5 000 inhabitants.

HORIZONTAL COOPERATION: Inter-municipal co-operation is strongly encouraged by the Länder, which decide independently on the rules of establishing such bodies. This long tradition aims to achieve “equivalent” living conditions in municipalities within Länder in their exclusive domains of competency, and to enable them to have an influence at the European level. There are 4 606 municipal associations (Gemeindeverband) in 2021, which have different forms and status (e.g. joint municipalities, association of communities and syndicates). Syndicates (Zweckverbände) in particular are special-purpose associations created to deliver standard local services, such as waste management, water and wastewater or transport. They are widespread throughout Germany and are one of the most common and oldest forms of inter-municipal co-operation in the country.

Germany’s territorial organisation is based on various metropolitan governance arrangements (e.g. public-public associations, public-private agencies, networks). Since the 1990s, municipalities in metropolitan areas were encouraged to co-operate in economic development, infrastructure planning, spatial planning or waste management. The German Ministerial Conference on Spatial Planning officially recognises 11 European metropolitan regions in Germany, which co-operate together since 2001 through the Network of European Metropolitan Regions in Germany (IKM). The IKM is a joint initiative led by the Länder and the federal government with a focus on economic development. Local actors’ involvement is made on a voluntary basis, which does not involve the downscaling of political or administrative functions.

OVERALL DESCRIPTION: According to the Basic Law, all legislative and administrative functions are assigned to the Länder, except for those under the exclusive competency of the federal government. Länder’s responsibilities are very broad, covering all main areas. Joint federal-Länder tasks were introduced in 1969, and there is some overlap in several areas (e.g. vocational education and training). The 2006 constitutional reform clarified responsibilities. Although all Länder enjoy the same degree of legislative power and the same responsibilities, the reform also introduced opt-outs in six policy areas (e.g. higher education, environmental protection). This right to stray from federal legislation is a new instrument for the Länder, introducing a degree of asymmetry into German federalism. In December 2018, the federal government enlarged the competences of Länder in sustainable development and climate-neutral administration (Klimaneutrale Verwaltung). Additionally, the 6^th Act amending the Local Public Transport Regionalisation Act (Sechstes Gesetz zur Änderung des Regionalisierungsgesetzes) of 16 July 2021 entailed the redistribution of some key competencies between the Federal Government and the Länder in the transport sector.

Functions of local authorities are defined by each Land and vary considerably from one Land to another. As a result, the degree of decentralisation at the local level also differs greatly among the Länder. Responsibilities usually include both mandatory and discretionary functions. In recent years, local governments have been empowered with new responsibilities, in particular in the social sector (e.g. the payment of basic security money for pensioners and disabled people following the merger of the federal unemployment agency with the municipal welfare agencies as part of the 2005 Hartz IV reform, and the legal right to provide municipal childcare for children under the age of three). Towns or cities called Städte

have some additional powers, in particular in administrative matters devolved by the state.

Main responsibility sectors and sub-sectors
SECTORS AND SUB-SECTORS	State level	Intermediate level	Municipal level
1. General public services (administration)	Internal administration, including services salaries and benefits of all public employees (exclusive); Justice (concurrent); Local government (exclusive)	Internal administration	Internal administration including staff management; Some administrative duties devolved by the state to Städte
2. Public order and safety	Police (exclusive)	Fire protection; Disaster control service; Rescue services	Local police
3. Economic affairs / transports	Regional economic development; Labour and economic law (concurrent)	Secondary roads; Public transport; Promotion of economic activity and tourism, pedestrian areas and cycle lanes	Local roads, local public transport; Waterways; Local economic development; Local tourism; Energy supply utilities; Waterways
4. Environment protection	Environment (concurrent)	Nature and landscape protection; Maintenance of nature parks; Household waste collection and treatment	Waste water management; Local green areas
5. Housing and community amenities	Local green areas (concurrent)	Spatial planning at district level; Building permits and inspection	Urban development planning (Land use and building plans); Urban development and regeneration; Water supply and sewerage; Housing incentives
6. Health	Health (concurrent)	District hospitals (construction and maintenance)	Health care and veterinary affairs
7. Culture & Recreation	Culture (exclusive power)	Public libraries (construction and maintenance); Support for cultural activities	Culture; Sports; Recreational areas and leisure
8. Education	Education including universities (construction and maintenance); Adult education colleges; Support for pupil exchanges	Secondary schools and technical schools (construction and maintenance)	Primary schools
9. Social Welfare	Social welfare (concurrent)	Social welfare (concurrent); Social welfare infrastructure	Social aid and youth; Child care

Scope of fiscal data: state governments, districts and municipalities; municipal associations including special purpose associations; non-market producers and non-profit institutions controlled by states and local governments.

SNA 2008

Availability of fiscal data: High

Quality/reliability of fiscal data: High

GENERAL INTRODUCTION: The Basic Law sets out detailed fiscal provisions relating to revenues and expenditures, in particular the assignment of intergovernmental transfers, exclusive and shared taxes, as well as equalisation principles between the federal government and the Länder. It also includes specific arrangements regarding municipalities, although local government financing is established by each Land. The 2009 Federalism Reform II on financial arrangements was supposed to address the system of intergovernmental finances. However, it did not result in a comprehensive restructuring of the system of fiscal federalism focusing mainly on agreeing on the phasing out of transfers in 2019 (Solidarpakt II and existing horizontal system) and introducing the “debt brake” to reduce future public debts (see below). Financial relations between the Federation and the Länder were reorganised, under July 2017 act amending the Basic Law and an August 2017 act amending the budgetary law on the reorganisation of the federal financial equalisation scheme as of 2020.

Subnational, state and local government expenditure by economic classification
	Dollars PPP / inhabitant			% GDP			% general government			% subnational, state and local government
-	SNG	State	Local	SNG	State	Local	SNG	State	Local	SNG	State	Local
Total expenditure	13 492	8698	4 794	24.9%	16.0%	8.8%	48.9%	31.5%	17.4%	100.0%	100.0%	100.0%
Inc. current expenditure	11 861	7 723	4 138	21.9%	14.2%	7.6%	46.8%	30.4%	16.3%	87.9%	86.3%	86.3%
Compensation of employees	3 575	2 393	1 182	6.6%	4.4%	2.2%	78.1%	52.3%	25.8%	26.5%	24.7%	24.7%
Intermediate consumption	2 344	1 193	1 151	4.3%	2.2%	2.1%	69.3%	35.3%	34.0%	17.4%	24.0%	24.0%
Social expenditure	2 376	1 170	1 206	4.4%	2.1%	2.2%	16.3%	8.0%	8.3%	17.6%	25.2%	25.2%
Subsidies and current transfers	3 391	2 829	562	6.3%	5.2%	1.0%	-	-	-	25.1%	11.7%	11.7%
Financial charges	167	131	35	0.3%	0.2%	0.1%	49.3%	38.9%	10.5%	1.2%	0.7%	0.7%
Others	9	7	2	0.0%	0.0%	0.0%	87.3%	70.5%	16.8%	0.1%	0.0%	0.0%
Incl. capital expenditure	1 631	9 745	656	3.0%	1.8%	1.2%	73.5%	43.9%	29.6%	12.1%	13.7%	13.7%
Capital transfers	655	512	144	1.2%	0.9%	0.3%	84.8%	66.2%	18.6%	4.9%	3.0%	3.0%
Direct investment (or GFCF)	976	463	512	1.8%	0.9%	0.9%	67.5%	32.0%	35.4%	7.2%	10.7%	10.7%

EXPENDITURE: German SNGs are key economic and social actors, responsible for almost half of public spending (48.9% in 2020), ranking 5th in the OECD and 4th among the nine OECD federal countries. The share of subnational expenditure has slightly increased over the last years as a result of the decentralisation process, the ageing population and, more recently, higher social needs related to the pandemic. SNGs are also key public employers, accounting for more than three-quarters of total public staff spending (78.1% in 2020). The Länder accounted for the majority of SNG spending and SNG staff spending (64.5% and 66.9% respectively), while spending responsibilities of local governments in Germany are significantly lower than the average of OECD countries (17.1% of GDP and 36.6% of public expenditure in 2020). Within the local sector, municipalities and municipal associations account for the lion’s share of local spending (vs. districts).

DIRECT INVESTMENT: Public investment in Germany is slightly below the average of OECD countries (1.9% in the OECD in 2020). The share of SNGs in public investment is higher than the average of OECD federal countries (61.5% in 2020), as well as in terms of share of GDP (2.0% in the 9 federations). Länder accounted for 59.8% of SNG investment in 2020, while the share of local governments in total public investment has decreased over the years. They accounted for 58% in 2010 but less than 30% 10 years after.

In response to the low level of local investment, the federal government has taken a comprehensive approach to stimulate investment by providing financial relief for municipalities. This support included a revision of the Basic Law in October 2016 to allow the federal state to provide financial support to financially weak municipalities through the EUR 7 billion Municipal Investment Promotion Fund (Kommunalinvestitionsförderungsfonds), notably for investments in public schools and vocational schools. Payments, however occur, after the work has been completed. The federal government also increased funding to the Länder and municipalities for urban development and housing. Local authorities that have been severely affected by structural changes in coal-mining regions also receive structural assistance from the federal government to support their economic transformation.

In Germany, most of the public-private parternships (PPPs) are contracted at the subnational level to finance investment projects. Subnational PPPs accounted for around 80% of Germany’s PPP investment in terms of volume. North Rhine Westphalia was the first Land to estbalish a PPP unit in 2001 and continues to lead in terms of PPP volume and value of deals in 2022 at both local and regional levels.

Subnational, state and local government expenditure by functional classification
	Dollars PPP / inhabitant			% GDP			% general government			% subnational, state and local government
-	SNG	State	Local	SNG	State	Local	SNG	State	Local	SNG	State	Local
Total expenditure by economic function	12 119	7 512	4 607	21.5%	13.4%	8.12	-	-	-	100.0%	100.0%	100.0%
1. General public services	2 740	1 949	791	4.9%	3.5%	1.4%	59.5%	42.3%	17.2%	22.6%	26.0%	17.2%
2. Defence	0	0	0	0.0%	0.0%	0.0%	0.0%	0.0%	0.0%	0.0%	0.0%	0.0%
3. Security and public order	806	646	160	1.4%	1.2%	0.3%	88.7%	71.0%	17.6%	6.7%	8.6%	3.5%
4. Economic affairs/transports	1 431	780	650	2.5%	1.4%	1.2%	64.4%	35.1%	29.3%	11.8%	10.4%	14.1%
5. Environmental protection	243	78	166	0.4%	0.1%	0.3%	67.4%	21.5%	45.9%	2.0%	1.0%	3.6%
6. Housing and community amenities	251	93	158	0.5%	0.2%	0.3%	84.0%	31.0%	52.9%	2.1%	1.2%	3.4%
7. Health	281	182	100	0.5%	0.3%	0.2%	6.8%	4.4%	2.4%	2.3%	2.4%	2.2%
8. Recreation, culture and religion	551	290	261	1.0%	0.5%	0.5%	90.7%	47.7%	43.0%	4.5%	3.9%	5.7%
9. Education	2 577	1 818	759	4.6%	3.2%	1.4%	91.3%	64.4%	26.9%	21.3%	24.2%	16.5%
10. Social protection	3 240	1 677	1 562	5.8%	3.0%	2.8%	23.9%	12.4%	11.5%	26.7%	22.3%	33.9%

Social protection, general public services and education are the three main areas of SNG spending, weighing between 21.3% and 26.7% of SNG expenditure in 2020. German SNGs are responsible for the large majority of overall public spending in the areas of education, recreation and culture, security and public order, and housing and community amenities (more than 80%). Health is a notable exception, as it is mostly a federal competence in Germany (only 6.8% of health expenditure was carried out at the subnational level in 2020).

At the Länder level, the primary areas of spending are general public services (26.0% of Länder spending in 2020), education (24.2%) and social protection (22.3%). Local government spending goes primarily to social protection (33.9% of local spending in 2020), general public services (17.2%), education (16.5%) and economic affairs/transport (14.1%). Social protection expenditure has increased significantly in recent years due to the transfer of new responsibilities to municipalities (e.g. childcare and youth services but also services related to the Asylum Seekers Benefits Act). By contrast, spending related to education and childcare, for which Länder and local governments are responsible, are likely to decrease in the future due to population ageing.

Subnational, state and local government revenue by category
	Dollars PPP / inhabitant			% GDP			% general government			% subnational, state and local government
-	SNG	State	Local	SNG	State	Local	SNG	State	Local	SNG	State	Local
Total revenue	13 108	8 213	4 895	24.2%	15.1%	9.0%	51.9%	32.5%	19.4%	100.0%	100.0%	100.0%
Tax revenue	6 814	5 150	1 663	12.6%	9.5%	3.1%	54.1%	40.9%	13.2%	52.0%	62.7%	34.0%
Grants and subsidies	4 254	1 880	2 375	7.8%	3.5%	4.4%	-	-	-	32.5%	22.9%	48.5%
Tariffs and fees	1 431	699	733	2.6%	1.3%	1.4%	-	-	-	10.9%	8.5%	15.0%
Income from assets	108	47	61	0.2%	0.1%	0.1%	-	-	-	0.8%	0.6%	1.2%
Other revenues	501	437	65	0.9%	0.8%	0.1%	-	-	-	3.8%	5.3%	1.3%

OVERALL DESCRIPTION: Intergovernmental finances are characterised by strong horizontal and vertical interdependence. Public revenue legislation is designed to ensure that the responsibilities of the different levels of government are properly financed. Länder accounted for 62.7% of total SNG revenue and municipalities for 37.3% in 2020. Tax revenue represented more than half of revenue of SNGs (52.0% in 2020), followed by grants and subsidies (32.5%), then tariffs and fees (8.5%). The share of tax revenue in SNG revenue and GDP was higher than in the OECD on average (17.0% of GDP and 45.3% of SNG revenue in 2020), as well as in OECD federations (20.3% of GDP and 57.5% of SNG revenue). The share of tax revenue was high at the Länder level (62.7% of Länder revenue in 2020), while local revenue was more balanced between grants (48.5% of local revenue), taxes (34.0%) and tariffs and fees (15.0%).

TAX REVENUE: The Constitution (Art. 106.3) allocates several particularly important taxes to the Federation, Länder and, to a certain degree, the municipalities. Federal laws determining these taxes and their distribution are subject to the approval of the Bundesrat. SNG tax revenue encompasses both shared and own-source taxes. Shared taxes include the personal income tax (PIT) (tax on wages and salaries, assessed income tax, withholding taxes on interest and dividends), the corporate income tax (CIT) and the value-added tax (VAT). The PIT is the most important source, representing 42.5% of SNG tax revenue and 22.1% of SNG total revenue. It is followed by the VAT (29.8% of SNG tax revenue and 15.5% of SNG total revenue).

Länder have little influence on their revenue as most of their tax revenue, and more than half of their revenue, comes from shared PIT, CIT and VAT. According to tax sharing arrangements, they receive 43.5% of the tax on wages and salaries and assessed income tax collected nationally, 50% of the withholding tax on dividends, as well as 44% for Länder and 12% for municipalities of the withholding tax on other investment income (interest, capital gains, etc.). Overall, the Länder received 74% of the subnational PIT and the local level the remaining 26% in 2020. Länder also received around half of VAT collected nationally and most of the SNG VAT (93.4%) in 2020. One-quarter of VAT receipts are allocated to financially weaker Länder, as a supplementary portion through the equalisation scheme, while the remaining 75% are distributed to each Land according to its population. Länder receive 50% of the CIT collected nationally (municipalities do not benefit from this tax). PIT and CIT revenues are distributed among each Land based on the revenue collected within their territory (principle of fair return). Länder also collect own-source taxes, the most important being the real property transfer tax (5.5% of Länder tax revenue), the inheritance tax (2.4%), the betting and lottery tax, the beer tax and a fire protection tax.

At the local level, only municipalities are funded through taxes. The districts have no tax revenue. Municipalities benefit from a share of PIT (15% of the total PIT) and VAT (2% plus a lump sum-share). PIT represented 45.3% of local tax revenue and 15.4% of total local revenue in 2020, while VAT accounted for respectively 32.1% and 10.9%. Other municipal tax revenues are own-source taxes, which includes primarily the trade tax (Gewerbesteuer) and the recurrent property tax (Grundsteuer), as well as some minor taxes (e.g. the local tax on entertainment and the dog tax).

The local trade tax is the most important municipal tax, representing 38.4% of municipal tax revenue (from 43.9% in 2019 due to the pandemic), 13.6% of total municipal revenue and 1.2% of GDP in 2020. Municipalities only retain a share of the receipts that they collect (91% in 2020), while transfering the difference to the federal government (3.5% of total receipts in 2020) and to the Länder (4.9%) as part of the equalisation mechanisms. The tax is levied on all industrial and commercial companies. Its rate is a combination of a uniform tax rate of 3.5% (base rate) and a municipal tax rate set by each municipality (Hebesatz or multiplier) individually. The tax rate currently ranges from 8.75% to 20.3% for municipalities with a population of at least 80 000 inhabitants.

The recurrent property tax amounted to 0.4% of GDP in 2020, which is below the OECD average (1.0% in 2019). It accounted for 12.8% of local tax revenue and 4.3% of local revenue in 2020. The tax has recently been reformed following a decision of the Federal Constitutional Court, which ruled that the valuation rules of the tax must be revised to be in line with the provisions of the Basic Law, especially with the principle of equality The first assessment of the reformed tax will take place in 2022. The values determined in accordance with the new law will be used to calculate the property tax from 2025 onwards. Until 2024, the old property valuations of 1964 (West Germany) and 1935 (East Germany) will continue to apply. The calculation of the new property tax is based on a property value approach, which is calculated with the market value of the property, the tax rate (0.031% for single-family houses, two-family houses, rental property and home ownership; 0.034% for business property, mixed-used land, partial ownership and others, 0.055% for agricultural and forestry undertakings) and the assessment rate which is set by each municipality (federal model). The reform also allows most municipalities to levy an additional tax on vacant construction land from 2025 onward in order to foster housing supply in cities. According to article 72 paragraph 3 number 7 of the Basic Law, the Länder have the right to adopt own regulations for real property tax that differ from federal law. Five Länder (Baden-Württemberg, Bavaria, Hamburg, Hesse, Lower Saxony) have made use of that right. Two Länder (Saarland and Saxony) will apply differing tax rates from 2025 onwards.

GRANTS AND SUBSIDIES: The Parliament adopted new regulations and constitutional amendments in 2020 to reform the intergovernmental fiscal relations between the federal state and the Länder by increasing the role of the former. The core element of the reform is the abolition of the horizontal equalisation mechanism between Länder. The two main categories of grants and equalisation mechanisms are now: (i) distribution of the Länder share of VAT revenue in a way that balances the fiscal capacities of the Länder (i.e. surcharges and deductions based on Länder fiscal capacity), and (ii) vertical equalisation through additional transfers to the poorest states, notably to the former East Germany since they do not receive receive “supplementary grants for special needs” for infrastructure since 2019. Finally, a new article of the Basic Law (143d) provides for annual transfers of EUR 400 million from the federal state to each of the Länder, Bremen and the Saarland, for an undefinit period, so that they can honour their debt brake.

There is no direct federal grant to local governments. At the local level, there are only grants from their Land. Grants represent a significant source of revenue and comprise general compensation, investment and specific grants. The principle of municipal equalisation is also enshrined in the Constitution and each Land is in charge of defining and implementing its own equalisation mechanism. Overall, current grants accounted for 86.5% of total grants and subsidies in 2020, the remaining 13.5% being capital grants.

OTHER REVENUE: “Other revenue” represented a significant source for SNGs, accounting for 15.6% of SNG revenue in 2020 (17.5% for the local level and 14.4% for Länder). User charges and fees paid by local citizens and corporations as users of local public services made up the bulk of “other revenue”, especially for local governments (15.0% of their revenue in 2020). Revenue from assets were not an important part of SNG revenue.

Subnational, state and local government fiscal rules and debt
	Dollars PPP / inh.			% GDP			% general government debt			% SNG debt			% SNG financial debt
-	SNG	State	Local	SNG	State	Local	SNG	State	Local	SNG	State	Local	SNG	State	Local
Total outstanding debt	13 859	11 250	2 610	25.5%	20.7%	4.8%	32.5%	26.4%	6.1%	100.0%	100.0%	100.0%	-	-	-
Financial debt	13 581	11 095	2 487	25.0%	20.5%	4.6%	33.1%	27.1%	6.1%	98.0%	98.6%	95.3%	100.0%	100.00%	100.00%
Currency and deposits	0	0	0	-	-	-	-	-	-	0.0%	0.0%	0.0%	0.0%	0.0%	0.0%
Bonds / debt securities	7 373	7 317	56	-	-	-	-	-	-	53.2%	65.0%	2.2%	54.3%	66.0%	2.3%
Loans	6 208	3 778	2 431	-	-	-	-	-	-	44.8%	33.6%	93.1%	45.7%	34.1%	97.7%
Insurance pensions	0	0	0	-	-	-	-	-	-	0.0%	0.0%	0.0%	-	-	-
Other accounts payable	278	155	123	-	-	-	-	-	-	2.0%	1.4%	4.7%	-	-	-

FISCAL RULES: The 2009 federalism reform (Article 109a Basic Law) set up a Stability Council (Stabilitätsrat), which represents the federal and state governments, to monitor budgetary developments and assess compliance with structural deficit targets contained in the Fiscal Compact. Balanced structural budget provisions and a “debt brake rule” were introduced in 2011 for the central government and Länder. Local governments must also balance their budgets. The Reform Acts of 2017 and 2019 extended the control powers of the Federal Court of Audits to enable it to conduct inquiries on Länder and municipalities that receive federal funds.

Länder are allowed to run a temporary deficit and the rule can also be suspended in the event of a natural disaster, an economic crisis or other one-off circumstances. Länder encountering financial problems received financial aid on an extraordinary basis from 2011 to 2019. In 2020-2022, the “debt brake” rule was put on hold through the emergency clauses to enable Länder to support the local economy during the pandemic. The rule will be re-instated in 2023 for the central and Länder governments. Some Länder also introduced fiscal flexibility at the municipal level to alleviate their fiscal burden linked to the crisis and to sustain their liquidity (e.g. Bavaria, Brandenburg, North Rhine-Westphalia, Schleswig-Holstein).

DEBT: Since the 2008 financial crisis, overall government debt has fallen significantly. SNG debt is lower than OECD average as a share of GDP in 2020 (27.9%), but remains above OECD average in terms of public debt (20.2%). Financial debt accounts for almost the entire outstanding debt, meaning that the share of other accounts payable is very limited. Bonds accounted for 53.2% of public debt and loans for 44.8% in 2020. In 2020, Länder held 81.2% of the debt stock and the local level 18.8%. Länder financial debt is composed of bonds (66.0%) and loans (34.1%), while local debt is made up almost entirely of loans. German Länder are by far the largest bond issuer among European regions. They rely on a broad and stable investor base. The Covid-19 crisis led to a record peak of net issuance from Länder, which amounted to EUR67 billion in 2020, after years of debt redemptions in recent years in preparation of the “debt brake” rule, initially scheduled from 2020.

TERRITORIAL MANAGEMENT OF THE CRISIS: The COVID-19 crisis fostered the role of the federal government. New legislation adopted in April 2021 granted the central government with more power to enforce Covid-19 regulations in Länder. The crisis also enhanced co-ordination between the different levels of government. The chancellor and the prime ministers of the Länder held weekly meetings, which were not enshrined in the Constitution, to coordinate their actions during the pandemic.

Länder are responsible for most policies that relate to fundamental personal rights and civil protection. The implementation of states of emergency or measures that restrict free movements of persons in case of disaster falls under the exclusive competencies of Länder. As a result, they were responsible for the implementation and enforcement of emergency measures during the pandemic. All Länder imposed the closure of schools, shopping centres and restaurants, and the prohibition of assemblies and meetings of more than three persons. No Länder requested quarantine. Only Bavaria and Saarland implemented a state of emergency, which allowed them to use supplementary policy tools, such the health equipment of the army. Additionally to civil protection, Länder are responsible for the provision of general public services and healthcare. They were in charge of the allocation of patients among hospitals, safety regulations and medical equipment within hospitals during the pandemic.

According to respective Länder constitutions, municipalities have the responsibility to implement measures that constrain personal freedom in case of natural diasters. As a result, some municipalities highly exposed to COVID-19 infection risks introduced emergency measures before Länder (e.g. curfews, restrictions to movements), which created overlapping with Länder directives later on. Some municipalities also took measures that went beyond the scope of Länder directives when the local sanitary situation requested it.

EMERGENCY MEASURES TO COPE WITH THE CRISIS AT THE DIFFERENT LEVELS OF GOVERNMENT: The federal government initiated a large programme of support for German SNGs, companies and households during the pandemic, including EUR 353 billion in budgetary measures, EUR 820 billion of guarantees and an additional budget of EUR 156 billion for loans. The federation also directly supported SNGs through a permanent increase of its contribution to housing benefits for unemployed persons (KdU) by 25 percentage points to alleviate subnational social expenditure.

The federal government and Länder implemented several measures for cities and municipalities during the crisis to support local investment. They introduced a “Municipal Solidarity Pact 2020” to compensate revenue losses of the local trade tax (‘Gewerbesteuer’). In addition to the Pact, the federal government provided an extraordinary EUR 2.5 billion subsidy to support local public transport in 2020.

IMPACTS OF THE CRISIS ON SUBNATIONAL GOVERNMENT FINANCE: The pandemic severely hit subnational economies in 2020 with high disparities among Länder. On the expenditure side, subnational spending increased significantly between 2019 and 2020 (9.7% in real terms). This was mostly driven by intermediate consumption (9.9%) and subsidies and current transfers (26.6%) to support local economies during the pandemic, but also capital expenditure (8.2%). This was particularly true at the Länder level, where expenditure increased by 14% in 2020, and capital expenditure by 6%. At the local level, municipal total spending increased by 2.6% in 2020, while capital expenditure rose by 11.2%.

Subnational revenue increased by 3.8% in real terms in 2020 compared to 2019, which reflects higher transfers during the pandemic (+26.7%) to compensate for the drop in tax revenue, tariffs and fees and revenue from assets. The decline in tax revenue was particularly sharp at the local level (-9.2%), as well as for the revenue from tariffs and fees due to the temporary closure of most municipal facilities in 2020. The fall in municipal tax revenue was mainly derived from the drop of the local trade tax and, to a lesser extent, the municipal share of PIT. At the Länder level, tax revenue decreased by 3.5% in 2020, mostly driven by the shortfall in CIT and PIT, but also other taxes (e.g. tax on beer).

After years of debt redemption to prepare for the “debt brake” rule initially planned for 2020 (re-instated from 2023), Germany’s subnational deficit increased in 2020. All Länder ran a deficit in 2020, with strong disparities among them, while municipal deficit was less severe. The increase in subnational debt (6.0% in real terms in 2020) is explained by the strong increase in Länder debt (+7.8% in 2020, with a 14.7% increase of bond issuance) as local debt decreased slightly in 2020.

ECONOMIC AND SOCIAL STIMULUS PLANS: The German government aligned its national recovery plan with the EU Recovery and Resilience Facility (RRF). Under the RFF, Germany will receive EUR 25.6 billion in funds by 2026, of which EUR 24 billion are related to green and digitalisation measures. Public investment is a key priority for the country’s recovery package, notably at the subnational level. It is estimated that EUR 450 billion will be needed in the next 10 years to overcome the backlog and to address environmental and demographical changes (ie. ageing).

Environment is a strong component of the German recovery package, notably concerning the coal mining regions of the country. Under the Structural Reinforcement Act for Mining Regions (Strukturstärkungsgesetz Kohleregionen), the federal government will provide EUR 40 billion in investment until 2038 to accompany the energy transition of these regions.

The federal government also introduced measures to improve local planning and capacity in order to boost further local investment, particularly in transporation and digital infrastructure (e.g. the Investment Acceleration Act, laws for increasing the implementation of green transport ‘Maßnahmengesetzvorbereitungsgesetz’).