Germany’s public sector is facing a widening fiscal gap, with preliminary data revealing a significant deficit for the first half of 2025. The consolidated public budget, encompassing the federal government, states (Länder), municipalities and social security funds, recorded a shortfall of €58.5 billion. This marks the first time public expenditures have surpassed the trillion-euro mark, reaching €1.0512 trillion against revenues of €992.7 billion.
The data, released by the Federal Statistical Office (Destatis), highlights a concerning disparity in fiscal health across different levels of government. While the federal government and states managed to reduce their individual deficits compared to the first half of 2024, municipalities are exhibiting a worsening situation. The federal government’s deficit stands at €30 billion, a reduction from €35.5 billion in the prior year, while the states’ deficit is a comparatively modest €2.4 billion, down significantly from €7.1 billion previously. However, the widening fiscal distress at the municipal level, with a deficit of €19.7 billion, represents a critical area of vulnerability currently impacting local service provision.
The revenue surge, largely benefiting the federal government and states, is propelled by increased Bundessteuern (federal taxes) and Gemeinschaftsteuern (collective taxes) like VAT, income tax and corporate tax. Municipal tax revenues, however, lagged behind, growing a comparatively meager 2.8%. Social security contributions saw a substantial rise of 9.1%, driven by contributions to health, long-term care and pension insurance.
A notable factor contributing to the federal government’s improved deficit position is a reduction in interest payments on debt, partially attributable to a change in accounting practices. The government reported a 19.9% decrease in these expenses, amounting to €16.5 billion.
However, the underlying structural issues concerning municipal finances remain a key concern. Increased allocation and subsidies to municipalities, while elevated compared to the previous year, haven’t kept pace with the escalating demand for local services. This discrepancy paints a picture of decentralized burden-shifting and potential long-term instability for smaller communities.
Analysts warn that the widening gap signals a potential need for a comprehensive review of fiscal distribution and potential reforms to address inequities in the system. The reliance on shifting costs downward to already strained local governments raises serious questions about the sustainability of Germany’s current fiscal model and its ability to support essential public services in the long term. Furthermore, questions are being raised about the transparency of the accounting changes influencing the federal government’s deficit figures.