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New German Municipal Wage Deal: Expensive But Still Manageable


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New German Municipal Wage Deal: Expensive But Still Manageable

Germany's new wage deal for municipal employees is the sector's most expensive wage round ever and significantly increases cost for the country's almost 11,000 municipalities. Combined with weaker revenue growth projected by Germany's new official tax forecast from May 11, it may lead to a small deficit in the country's municipal sector if no effective countermeasures are taken. Yet, we believe the agreement is, on average, fiscally manageable.

On April 22, 2023, representatives of German municipalities, the federal government, and public sector unions agreed on a new wage deal for ordinary status employees of the federal government, municipalities, and various municipal enterprises like hospitals, childcare facilities, public transportation, and waste collection. The deal covers the 2023-2024 period and has now been approved by a union members' ballot. Special status civil servants ("Beamte") are formally not covered but usually are granted equivalent raises by their employers.

Municipal representatives estimate that the deal will cost a total of €17 billion. We calculate it will lead to a more than 9% increase in staff-related costs in 2024. From March 2024, each covered employee's monthly salary will rise by €200 and a linear adjustment of 5.5%, totaling a pay increase of at least €340 per month. Prior to that, only a one-time, tax-free inflation compensation payment of €3,000 per person will be distributed in monthly installments. The wage deal determines salaries until the end of 2024, when new negotiations will become necessary.

Putting The Agreement Into Perspective

Several reasons lead us to believe that the wage agreement is, on aggregate, still manageable for German municipalities' budgets.

On average, German municipalities posted surpluses in the last five consecutive years.  Even the COVID-19 pandemic did not interrupt that development in 2020, thanks to significant state and federal transfers ensuring municipalities' budgetary balance (see chart 1). Therefore, the municipal sector is, in our view, able to absorb the rise in wages. Considering lower revenue growth expectations as per Germany's tax revenue forecast from May 2023, however, the sector's financial cushion may not be big enough to avoid a small deficit.

Chart 1


Staff costs only make up about 27% of municipalities' total expenditure.  An increase in personnel-related expenditure of slightly more than 9% for 2024 dilutes to just 2.5% of additional total expenditure.

By pushing the effective start date for the salary raise to March 2024, the agreement gives municipalities a significant head start to increase revenue in the meantime.  Taxes, with 37% the largest component of total municipal revenue, tend to be positively correlated with economic growth and inflation, thereby providing a natural hedge to inflation-related spending pressures. We estimate that an average growth rate of about 4% per annum for all municipal taxes over 2023 and 2024 would already be sufficient to fully compensate for the budget impact of the agreement in 2024. Germany's official tax revenue forecast from May 2023 puts expected municipal tax revenue growth at almost 3% in 2023 and 4% in 2024.

Agreement's Fiscal Impact Differs By Region

Even though we think the wage deal is manageable on the whole, we note substantial differences between the German states (see chart 2). It is only in a minority of states where the municipal sector, based on previous budgets' surpluses exceeding the impact of the salary increase, might be able to fully absorb the additional cost from the agreement without falling into deficit. Our data also shows that the cost impact of the wage agreement on municipalities, combined with an assumed wage drift for 2023, varies between less than 3% of overall revenue and more than 4%. The latter might require a stronger policy response.

Chart 2


The municipal wage agreement is not applicable to state level employees. German states, of which S&P Global Ratings rates six, will renegotiate salaries only later this year, after their own collective bargaining agreement has expired at the end of September. Yet, the municipal agreement has set a benchmark that negotiations for the states' ordinary status employees can hardly ignore. We, therefore, expect staff compensation to constitute the most dynamic expenditure position also in German state budgets in 2024.

Related Research

This report does not constitute a rating action.

Primary Credit Analyst:Michael Stroschein, Frankfurt + 49 693 399 9251;
Secondary Contacts:Sabine Daehn, Frankfurt + 49 693 399 9106;
Stefan Keitel, Frankfurt + 49 693 399 9254;

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