Germany's cities hit by record €31.9B budget crisis

German cities face €31.9 billion deficit crisis in 2025 financial meltdown

Germany's Budget Deficit Soars to €31.9 Billion in 2025—Highest Since ReunificationCities Raid Public Utility and Housing Company Profits to Plug Gaps, but East Germany Faces Bankruptcy and Privatization

In 2025, the core and extra budgets of Germany's municipalities and municipal associations recorded a financing deficit of €31.9 billion—the largest since reunification, according to preliminary figures from the Federal Statistical Office's quarterly cash report. The previous record, set in 2024 at €24.8 billion, was exceeded by an additional €7.1 billion. Last year, 7.5% of expenditures were not covered by regular revenue, while debt from short-term cash loans rose by 16.5% year-over-year. To ease the strain, many cities are turning to the profits of their municipal utilities and housing companies.

Public Utility Profits as a Stopgap for Strained Budgets

Some municipalities are pinning their hopes on their subsidiaries to stabilize shaky finances, pursuing two main strategies: First, direct profit distributions, where city councils—acting as shareholders—mandate higher payouts from municipal utilities, housing associations, or transport operators. Second, tax cross-subsidization, where profits from lucrative sectors like energy offset losses in deficit-ridden areas such as public transit or swimming pools.

The most striking example comes from Dortmund, where city-owned utility DSW21 approved a €500 million payout for 2024–2027 to help the city avoid a budgetary emergency.

In Karlsruhe, however, the voter group FÜR Karlsruhe criticized a similar approach amid a €60 million austerity package. City councilor Gernot Kalmbach warned: "Draining profits from municipal companies today robs them of the funds they'll desperately need tomorrow for affordable housing, the heating transition, and climate-neutral infrastructure." The dilemma is stark: A recent study by the Association of Municipal Enterprises (VKU) found that energy providers alone will require €22.7 billion in investments over the next decade—yet the very profits earmarked for these projects are being siphoned off to prop up city budgets.

Housing Companies Forced to Foot the Bill

Other cash-strapped municipalities are tapping their public housing companies for relief. The case of Halle's municipal housing provider (HWG) illustrates the consequences: The city demanded an extra €15 million by 2030—on top of the €2.5 million already transferred annually. Experts warn that such sums can only be raised through rent hikes, deferred modernizations, canceled new builds, or selling off apartments. The Saxony-Anhalt Housing Industry Association confirms this is a nationwide issue, particularly in structurally weak regions with high vacancy rates. In the worst cases, housing companies may have no choice but to sell off stock—a short-term fix for city coffers but a long-term loss of public assets. Soaring construction costs have already made new builds barely viable.

DDR Legacy Debt: A Historical Burden for East German Housing Firms

East Germany's housing companies face an added challenge: unresolved debts from the GDR era. When Germany reunified, loans taken out for state-owned housing under the East German regime were converted into conventional bank liabilities—despite the fact that the system's low rents had never accounted for repayment. Over 35 years after reunification, many firms still carry this legacy debt. In Saxony alone, members of the Saxony Housing and Real Estate Association (VdW) are saddled with roughly €445 million in DDR-era debt—equivalent to €33 per square meter of housing.

Bankruptcy and Privatization: The Final Outcome

For some, the cycle ends in insolvency or privatization—a fate already unfolding in parts of eastern Germany.

What Happens When Profit Skimming Meets Legacy Debt: Lessons from Saxony-Anhalt

The consequences of profit extraction colliding with historic debt are already visible in several municipalities across Saxony-Anhalt. In recent years, municipal housing companies in Burg and Thale were sold off to private investors, while the one in Nachterstedt was liquidated. In 2023, the Umland Wohnungsbau GmbH in Egeln followed suit, filing for self-administered insolvency—leaving 1,600 apartments and debts totaling around €20 million in its wake. Jens Zillmann, director of the VdW Sachsen-Anhalt housing association, sounds the alarm: "Public assets are being squandered, and housing as a public good is slipping out of municipal control."

Federal Fiscal Court Ruling 2024: Legal Threat to Cross-Subsidization

The tax practice known as cross-subsidization—where public entities offset profits and losses across different operations—now faces additional legal pressure. On August 29, 2024, Germany's Federal Fiscal Court (Bundesfinanzhof, BFH) issued a landmark ruling (Case No. V R 43/21) on the tax consolidation of commercial public enterprises (Betriebe gewerblicher Art, BgA). The decision has far-reaching implications, particularly for municipalities and public companies seeking to reduce their tax burdens by balancing gains and losses.

The court ruled that the technical and economic interdependence required for loss offsetting must exist among all consolidated entities—not just between some of them. Under the stricter interpretation, many municipalities would have lost the ability to offset losses from public swimming pools or local transport against profits from energy suppliers, leading to significantly higher tax liabilities in individual cases.

In response, the Federal Ministry of Finance issued a non-application decree on June 6, 2025, allowing the existing practice of chain consolidation to continue—for now. However, this reprieve is temporary: if the BFH reaffirms its stance in a second proceeding, only legislative intervention could preserve cross-subsidization in its current form. The coalition agreement already includes plans to overhaul the legal framework.

Municipal Finances: What Reforms Are on the Table?

Current projections from Germany's leading municipal associations paint a bleak picture: rather than shrinking, annual deficits are set to balloon to over €35 billion in the coming years. The pressure on public subsidiaries will only intensify. While the coalition agreement outlines potential reforms—a larger share of VAT revenue for municipalities, relief on social spending, and legal safeguards for cross-subsidization—none have yet been implemented. In the meantime, stopgap measures to plug budget gaps risk further undermining the long-term investment capacity of public enterprises.