Housing Booms and Busts and Local Fiscal Policy

IEB Working Paper N. 2017/05

54 Pages Posted: 10 Mar 2017

See all articles by Elisabet Viladecans-Marsal

Elisabet Viladecans-Marsal

University of Barcelona

Albert Sole-Olle

University of Barcelona; CESifo (Center for Economic Studies and Ifo Institute)

Multiple version iconThere are 3 versions of this paper

Date Written: March 9, 2017

Abstract

This paper examines how local governments adjust their spending, savings and taxes in response to a temporary revenue windfall generated by a housing boom and how they cope with the inevitable shortfall that appears during the bust. We focus on Spanish local governments given the intensity of the last housing boom-bust experienced there and the large share of construction-related revenues they obtain. We find, first, that just a small share of the boom windfall was saved, with revenues being used primarily to increase spending (above all, current spending) and (to a lesser extent) cut taxes. Second, we find that the failure to save during the boom is higher in places with less informed voters and more contested elections. Third, we also examine what happens during the bust, and find that these governments had to cut abruptly their spending (above all, capital), raise taxes, and allow deficits to grow. Finally, in places wit less informed voters and more contested elections local governments had more trouble in adjusting during the bust, and they tend to rely more on spending cuts than on tax increases.

Keywords: Tax volatility, forward-looking behavior, policy myopia

JEL Classification: E62, H72, R5

Suggested Citation

Viladecans-Marsal, Elisabet and Sole-Olle, Albert, Housing Booms and Busts and Local Fiscal Policy (March 9, 2017). IEB Working Paper N. 2017/05. Available at SSRN: https://ssrn.com/abstract=2930329 or http://dx.doi.org/10.2139/ssrn.2930329

Elisabet Viladecans-Marsal (Contact Author)

University of Barcelona ( email )

Gran Via de les Corts Catalanes, 585
Barcelona, 08007
Spain

Albert Sole-Olle

University of Barcelona ( email )

Gran Via de les Corts Catalanes, 585
Barcelona, 08007
Spain

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

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