Subdued tax revenue growth and rising operating expenditures (including due to increased staff compensation and social benefits), will maintain pressure on German local and regional government (LRG) budgets over 2025-2026.​ Deficits might have already peaked in 2024, but we expect them to abate only very slowly.​ Germany’s debt brake, despite its balanced budgets principle, allows for limited LRG deficits in a cyclical downturn.​