Bundestag passes €1 billion annual relief law for Germany's cash-strapped states and municipalities

The vote

On Thursday evening, the Bundestag passed the Länder- und Kommunalentlastungsgesetz, a law that will provide a total of €4 billion in relief from 2026 to 2029. The measure was approved by the ruling coalition of CDU/CSU and SPD, despite the federal government's own fiscal constraints. The law must still be approved by the Bundesrat.

This is a very strong signal of solidarity from the federal government with the states and municipalities.

Where the money goes

The package allocates the annual €1 billion in three streams. A quarter (€250 million) goes directly to financially weak municipalities to fund kindergartens, swimming pools, and libraries; North Rhine-Westphalia stands to receive over €164 million annually from this portion. Another €350 million supports eastern states in covering costs for DDR supplementary pensions, such as those for former employees of the National People's Army and People's Police. The remaining €400 million flows into the Länderfinanzausgleich, the fiscal equalization system, and benefits the donor states: Bavaria, Baden-Württemberg, Hesse, and Hamburg.

Municipalities under strain

For years, municipalities have faced rising social spending without corresponding revenue growth. Municipal associations recently warned of a potential collapse, forecasting annual deficits of nearly €30 billion. In Unkel am Rhein, the local football field fell into disrepair, and the town could not afford repairs or a loan, relying on a citizens' foundation to fund the work.

We have no leeway for voluntary spending whatsoever. What we can still do are the mandatory tasks that come up. Unfortunately, we lack the corresponding financial resources for those as well, so we often have to take on debt for them.

Fehr noted that citizens are frustrated as services shrink and property tax rates rise.

A step toward "Wer bestellt, bezahlt"

The idea that the level of government ordering a policy should bear its costs gained traction at the Ministerpräsidentenkonferenz (MPK) in Berlin in late June, where federal and state leaders agreed on the principle "who orders, pays". The new law is a partial implementation, but municipal leaders argue it falls well short of fully addressing the structural underfunding. The debate over reordering federal-state finances is set to continue.