The Impact of the Housing Bubble on the Growth of Municipal Debt: Evidence from Spain

Abstract

The aim of this paper is to analyse the impact of the recent Spanish housing boom and the subsequent burst on local public finances. Particularly, we investigate the effect of the rise and later fall in revenue from urban development on local government debt. Using a sample of the Spanish largest municipalities in the period 2003–2011, we find that debt was substituted by revenue from urban development during boom years and this substitution effect vanished after the burst of the boom. Our results also reveal that local public finances have worsened after the burst of the housing bubble since now they have larger current spending and smaller savings.

Key Words:

• Local government
• housing crisis
• public finance
• municipal debt

Notes

1. Revenue from the granting of use rights of municipal-owned property assets appears not as a separate item in the municipalities’ budgets that are available, but merely as a part of a general item for concessions, namely ‘Concessions and special uses’ (Concesiones y aprovechamientos especiales). For this reason, we employ the budgetary line item ‘Concessions and special uses’, even though only revenue from special uses can be considered to be related to urban development.

2. The sum of the coefficients for the variables urbandevlop_revenue and urbandevlop_revenue*postbubble is significantly different from zero.

3. The sum of the coefficients for netsave and netsave*postbubble variables is significantly different from zero.

4. The sum of the coefficients for capitaltransfer and capitaltransfer*postbubble variables is significantly different from zero.

5. The sum of the coefficients for taxes and taxes*postbubble variables is significantly different from zero.

Additional information

Notes on contributors

Bernardino Benito

Bernardino Benito is a professor of public sector accounting at the University of Murcia, Spain. His research interests are in the areas of finance, transparency, PPP agreements, management and audit, all in the public sector. He has published recently in Australian Accounting Review, Journal of Cultural Economics, Kyklos, Public Choice and Crime, Law and Social Change.

Cristina Vicente

Cristina Vicente is an assistant professor of accounting at the University of Murcia, Spain. Her research focuses on financial management, transparency and debt in the public sector, and has appeared most recently in Journal of Cultural Economics, Lex localis - Journal of Local Self-Government, Kyklos, Swiss Political Science Review and Spanish Accounting Review.

Francisco Bastida

Francisco Bastida is a professor of accounting and finance at the University of Murcia, Spain. His research focuses on the impact of transparency in government financial reporting on socio-economic variables from an international perspective, and has appeared most recently in Journal of Cultural Economics, International Public Management Journal, Public Choice and Public Administration Review.