The COVID-19 Crisis Endangers Municipal Investments – Municipalities Urgently Need Reliable Support Beyond 2020
ResearchScientific Study: COVID-19 Effects Having Significant Impact on Municipalities
The COVID-19 pandemic is dramatically worsening the financial situation of municipal authorities in Germany, even threatening their ability to invest. At this rate, municipalities will need commitments from the federal and state governments to provide further support in the billions even beyond 2020. Only then could municipal authorities successfully contribute to stabilising the economy, since without further aid, it will be impossible for many of them to make the necessary investments for reducing the current investment backlog. These are the results of a joint study conducted by ZEW Mannheim and the German Institute of Urban Affairs (Difu) on behalf of the German Association of Cities.
Other key findings of the study:
- More companies are threatened by insolvency as a result of the pandemic and the subsequent economic downturn. The most vulnerable sectors of the economy are having a strong impact on urban life, including the gastronomy sector, retail, and entertainment and culture, which is further compounded by slumps in sales in individual sectors of the manufacturing industry.
- Though economic impacts on the municipalities vary greatly from region to region, the economic consequences mean considerable revenue losses for municipal authorities in 2020 and beyond. At the same time, municipalities will have to increase social spending.
- The extent to which municipalities are affected depends on the crisis-ridden industries found in the area, such as the gastronomy sector, entertainment, tourism, and retail. This mainly affects municipalities in Bavaria, Rhineland-Palatinate, Lower Saxony, Schleswig-Holstein, and Saarland.
- The potential of municipalities to counteract the economic consequences of the pandemic varies greatly. Where debt levels, structural unemployment and the risk of resident companies defaulting are high, resilience falls. This applies above all to municipalities in North Rhine-Westphalia, but also in isolated cases in Rhineland-Palatinate, Hesse, and Brandenburg.
- According to the study, municipalities that were already economically less resilient before the COVID-19 pandemic and are now highly susceptible to crises will find it particularly difficult to make the necessary investments while also coping with the consequences of the pandemic.
- The current uncertainty about the extent of revenue losses and corresponding compensation by the federal and state governments in 2021 and 2022 increases the probability of drastic cuts in municipal budgets.
- Without further, targeted aid measures, it will be difficult – especially for municipalities that are particularly susceptible to crises – to make the necessary investments that are also sensible in terms of economic policy. Existing regional disparities will further increase in the medium term.
- Since both the extent to which municipalities are affected as well as their resilience vary from region to region, regionally effective accompanying measures will be necessary in order to mitigate the economic consequences of the pandemic in a targeted manner.
“The COVID-19 pandemic and the downturn resulting from it are hitting municipalities particularly hard. Federal and state governments have to ensure that the current effort made by municipalities to reduce investment backlogs doesn’t come to a halt,” notes ZEW President Professor Achim Wambach about the results of the study.
“Without further, targeted aid measures, it will be difficult – especially for municipalities that are particularly susceptible to crises – to make the necessary investments. The economic stimulus package must evolve into a growth programme and provide municipal authorities with the necessary planning security for beyond 2020. This, of course, requires additional measures,” comments Professor Sebastian Siegloch of ZEW Mannheim.
“The considerable drop in revenues in 2020 and the years ahead is a major problem for municipalities, since the already quite large investment backlog of around 147 billion euros will continue to rise as previously planned municipal investments are no longer viable. A solution should be found so that financially weak municipalities in particular receive not only investment funds but also resources for their own personnel,” adds Difu Director Professor Carsten Kühl.
“With the new tax estimate coming next week, federal and state governments have to come up with an answer fairly quickly as to how to stabilise municipalities in the medium term. True, the federal government wants to take over commercial tax losses for 2020 and make a greater long-term contribution to accommodation costs as part of the basic provision for job seekers. Both of these actions are good. But they alone will not prevent a slump in municipal investment in the coming years. What could really help are commitments from the federal and state governments to provide support beyond 2020. And we need an accompanying programme for municipalities that are particularly vulnerable to crises so that investments are still being made where they’re direly needed,” concludes Helmut Dedy, the German Association of Cities’ managing director.
