
Key points of municipal financing in Austria
Austria, as a federal state, operates on a multi-level administrative system comprising three levels: the federal government, the regions (Länder), and the municipalities. There are nine regions (Länder) and 2,093 municipalities, reflecting a small-scale structure of local administration. Local self-government (kommunale Selbstverwaltung) is enshrined in the Austrian constitution.
Municipalities are responsible for local services of general interest (kommunale Daseinsvorsorge), including child care, municipal infrastructure (primary education, roads, water supply and waste [water] disposal), and public leisure and cultural facilities. Municipalities also provide municipal housing.
Shared taxes (including VAT, income, and corporation taxes) are the most important ongoing source of revenue for municipalities, accounting for 40% of municipal revenue. Those are regularly determined in so called financial equalisation negotiations between the three tiers of government (federal, regional and local) (Fiscal Equalisation Act). The municipalities’ own municipal taxes (these are currently primarily municipal tax [a payroll tax] and property tax) and fees amount to 19% and 10%, respectively. In addition, earmarked charges are levied for water supply and waste (water) disposal. A complicated transfer system among the three tiers of government plays a crucial role. On the one hand, the municipalities have to pay levies to the regions (Länder) (primarily for health and social affairs), while on the other hand the regions (Länder) make transfers to the municipalities as part of the equalisation of resources and to promote investment. Overall, the municipalities make significantly more transfers to the regions (Länder) than they receive in return.
Current financial situation
Austria’s municipal finances are currently under pressure. The forecasts point to a significant deterioration in the financial situation of the municipalities in the medium term. Their ability to cover expenses independently is expected to decrease. It is estimated that up to 40% of municipalities will struggle to maintain self-sufficiency, and municipal investments are likely to fall sharply. The reasons for this include tax reforms that have reduced municipal revenues, the strain of high inflation, and the rapid increase in levies paid to the regions (Länder), which outpace revenue growth.
Before the pandemic the financial resources for investments from current operations were still at 12 to 13 percent. It is expected that the financial resources will be halved in the next few years (Fig.1).

Increasing financing needs
Due to the high growth of levies in the areas of healthcare and social services the income of is municipalities increasingly eroding. As a result, municipalities only have an average of around 50 cents left of each euro in income from shared taxes. By 2027 it will only be 40 cents.
The financial situation is also difficult, because of additional tasks for the municipalities. These concerns especially additional requirements in childcare, as Austria has not yet achieved its childcare quota requirements. However, the Austrian financial equalization act does not adequately cover the resulting additional expenses in ongoing operations. A reduction in group size also leads to additional expenditure in several regions.
There is also a high need for investment in the area of climate protection and adaptation to climate change. These include achieving a 3 percent renovation rate for municipal buildings or implementing the mobility transition (e.g. through the expansion of inner-city public transport services or the decarbonization of vehicles).
Necessary Reforms
Due to the difficult financial situation of the municipalities, there have been several financial allocations from the federal and regional levels in recent years. Since the federal and regional levels now also have to implement financial cuts, it is to be feared that financial allocations will decrease. This will lead to further financial cuts at the municipal level.
As a consequence, thereof municipalities will have to look for increases in efficiency – for example through regional cooperation – and will have to reduce services (including closures) and investments. As the municipalities are a major public investor this will lead to a decline in the quality of the infrastructure and contracts for the local economy.
To stabilize municipal finances in the medium-term sustainable reforms are required. This could be done by strengthening the municipalities' income - for example by eliminating co-financing in the areas of social and health and increasing their own taxes.
If you would like to read more about the municipal finance forecast (in German), click here.