Housing booms and busts and local fiscal policy

Albert Solé-Ollé and Elisabet Viladecans-Marsal

No 17-001, ZEW Discussion Papers from ZEW - Leibniz Centre for European Economic Research

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) to 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 the 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 behaviour; voter information (search for similar items in EconPapers)
JEL-codes: E62 H72 R5 (search for similar items in EconPapers)
Date: 2017
New Economics Papers: this item is included in nep-cdm, nep-mac and nep-ure
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https://www.econstor.eu/bitstream/10419/148922/1/876456999.pdf (application/pdf)

Related works:
Working Paper: Housing booms and busts and local fiscal policy (2017)
Working Paper: Housing booms and busts and local fiscal policy (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:zewdip:17001

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