The fatal mistake in the public sector: Why the industrial collapse ultimately affects civil servants too – Image: Xpert.Digital
The deceptive security of civil servants: Why pensions are also at risk without industry
Alarm bells ringing in local communities: The collapse in trade tax revenue heralds the next major crisis
The economy is in crisis, traditional companies are relocating abroad, and municipal tax revenues are plummeting – yet a deceptive sense of unshakeable security still prevails in large parts of the public sector. After all, the state pays, not the free market, or so the widespread belief goes. But this attitude ignores a fundamental economic law: No state generates its own money. The salaries of millions of civil servants, public sector employees, and pensioners rest on a foundation that is currently showing alarming cracks – the profitability of the private sector. A look at France shows us in real time what happens when an overblown state apparatus loses control of its finances. For Germany, whose public spending ratio has now reached alarming proportions and whose industrial base is crumbling, this is a stark warning signal. Who will foot the bill when the state runs out of money? An analysis of the bitter reality that will inevitably catch up with Germany.
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By the end of June 2026, the French central government had a budget deficit of €107 billion, exceeding the originally projected figure by 14.4 percent. Without a radical course correction, a deficit of around six percent of GDP is looming at the central government level by the end of the year, while the overall government deficit, including social security, regions, and municipalities, could even rise to around eight percent of GDP. The rating agency Fitch has already reacted, downgrading France's credit rating from AA minus to A plus, explicitly citing the persistently increasing debt burden and the lack of a credible consolidation path. Planned tax increases are currently expected to generate only around €9 billion in additional revenue, while genuine structural reforms remain elusive. Because France is the second-largest economy in the eurozone, a reassessment of its credit risk could quickly have repercussions across the entire European bond markets.
The difference that should actually hit Germany harder
A key difference between the two countries lies in their energy policy starting points. Despite significant investment backlogs, France still maintains a fleet of nuclear power plants that secures a substantial portion of its electricity supply, while Germany permanently shut down its last three reactors in April 2023 and has since had to decommission a total of 29 plants. This was estimated at around €23 billion according to the planning at the time, but these costs are tending to rise. What was once a reliable and comparatively inexpensive source of baseload power has thus become a pure cost burden without energy output, while simultaneously creating a structural electricity shortage that places an additional burden on energy-intensive industries. This energy shortage is hitting particularly hard those sectors from which the German economy traditionally derived its international strength: automotive, chemicals, and mechanical engineering. Because France never possessed this industrial base to a comparable extent, an economic downturn has a different impact there than in Germany, where far more technological and industrial value creation is at stake.
A state apparatus that grows while its base shrinks
Germany's government spending ratio, the share of total public spending in economic output, was around 50.2 to 50.6 percent in 2025, according to the European Commission. This marked the first time since the COVID-19 pandemic that it had risen above the psychologically significant 50 percent mark. A further increase to approximately 51.4 percent is expected for 2026 and to around 51.5 percent for 2027. This puts Germany significantly above the levels of other major industrialized nations, such as the United Kingdom at 46.9 percent, Japan at 41.3 percent, or the United States at just 39.6 percent. This figure demonstrates that in Germany, more than half of every euro earned now flows through public coffers – a level of public redistribution that, in its magnitude, is actually approaching centrally planned economies more closely than those of classically market-based economies. Anyone working in such a system as a civil servant, pensioner or public employee receives their income from a redistribution apparatus, the funding of which, however, still depends on the earning power of the private, productive economy.
The deceptive reassurance that the crisis does not affect oneself
While car factories close, the chemical industry increasingly shifts production to China, and mechanical engineering companies lose orders en masse, many public sector employees believe these developments don't affect their livelihoods because their salaries come from the state, not an industrial company. This attitude, however, overlooks a fundamental economic mechanism: No state produces its own money or value; rather, it finances itself exclusively through taxes levied by productive sectors of the economy—specifically, business tax, corporate tax, income tax, and social security contributions from industrial workers. These revenue streams form the foundation upon which the ever-expanding public sector, with its salaries, pensions, and social benefits, rests. If the industrial base collapses permanently, this flow of money will inevitably dry up, albeit with a time lag, because funding gaps are initially bridged by additional borrowing before real cuts become unavoidable.
Local authorities as an early warning system for a larger development
What seems abstract at the national level is already reflected in concrete figures at the municipal level. The May 2026 tax revenue forecast revised the expected revenues for the federal government, states, and municipalities downwards by a total of €17.8 billion compared to the autumn forecast. Of this, approximately €9.9 billion is attributable to the federal government, almost €3 billion to the states, and €4.3 billion to the municipalities. By 2030, the expected revenue shortfall for municipalities will total around €24 billion compared to the original autumn forecast, with the struggling economy and a high number of corporate insolvencies cited as the main reasons for the collapse in trade tax revenue. Traditionally industrial states are particularly affected: In Baden-Württemberg, for example, a shortfall of €853 million in trade tax revenue is expected for 2026 alone, an amount that will increase to almost €900 million by 2028. Bavarian municipalities anticipate a decline in trade tax revenue of approximately 3.4 percent for 2026, while municipal expenditures continue to rise – a combination that has already prompted the Bavarian Association of Cities and Towns to issue strong warnings. A Bertelsmann report on municipal finances for 2026 records even more drastic declines for some states, such as a year-on-year decrease of 6.9 percent in Baden-Württemberg and 6.8 percent in Saxony, while trade tax revenue has already decreased by almost twelve percent nationwide compared to 2023.
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Why trade tax is the true seismograph of the economy
Trade tax, accounting for approximately 81 percent of total municipal tax revenue, is by far the most important source of local financing and reacts directly to the economic situation of local businesses. In 2024, it generated a net revenue of €62.1 billion, representing a minimal increase of only 0.3 percent – a harbinger of the stagnation and, in some cases, declines that have occurred since then. Because this tax is directly linked to corporate profits, every factory closure, every relocation, and every insolvency impacts municipal finances almost in real time, significantly faster and more directly than, for example, changes in income tax. This close link makes trade tax one of the earliest and most reliable indicators of the actual state of the regional economy, even before the effects are reflected in official growth or employment statistics.
The moment when cuts become unavoidable
If revenues from the productive economy decline permanently, every state ultimately has only a limited number of options. In the short term, the gap can be bridged by taking on additional debt, as France is currently doing with its record deficit of €107 billion, and Germany with its expected net federal borrowing of around €89 to €98 billion for 2026. In the medium term, however, a persistently weakening revenue base inevitably leads to cuts in investments and subsidies, while in the long term, personnel costs, pension entitlements, and social benefits will also be at risk. The reason is simple: No state can permanently distribute more than its economy actually generates. Precisely because public employees, pensioners, and other public sector employees receive their benefits directly from the state budget, they would not be mere spectators in such a consolidation, but rather the first to be directly affected as soon as the currently comfortable financing through new debt reaches its political and economic limits.
What France's shock means for Germany's future
France's current budget crisis thus provides less of a blueprint for precisely the same figures than a demonstration of the underlying mechanism: seemingly stable public finances can quickly prove unsustainable if reforms are postponed for years and real economic output fails to keep pace with spending promises. While Germany still has a formally better starting position with a more stable credit rating, its high dependence on industry, its above-average government spending ratio of over 50 percent, and the already evident erosion of its business tax base make it structurally particularly vulnerable. Anyone in the public sector who still feels secure today fails to recognize that their own economic stability is inextricably linked to the state of that industry, whose gradual decline has already measurably begun.
