Urban sprawl and municipal budgets in Spain: a dynamic panel data analysis(Preliminary Draft, please do not quote)

Resumen

Recently urban sprawl has become a matter for concern all around Europe, in particular in southern countries where its environmental and economic impact has been severe. This low-density and spatial expansive urban development pattern has an outstanding impact on municipal budgets. On the one hand, local governments might see sprawl as a source of potential resources, in terms of sales of public land and taxes associated to building purposes, increasing transfers from upper tiers of government and the obligation that developers are under to give a portion of newly-developed land to the municipality. On the other hand, sprawl increases spending as it raises the provision costs of certain local public goods and requires larger investments in extending basic infrastructure to new developments. Therefore, which is the net fiscal impact of urban sprawl? Do local governments consider the long-run net fiscal impact of new development or just focus on short-term benefits, ignoring future costs of development? This paper addresses these questions by analysing the dynamic relationship between urban sprawl and local budget variables. With that purpose, we undertake the estimation of a panel vector autoregressive model using data of 4,000 Spanish municipalities over the period 1994-2005. Computed GIRFs show that sprawl: (i) considerably increases demand for new infrastructure, (ii) leads to a short-term current surplus, as current spending is reduced given the delay on public services provision to new developments and current revenues increase, (iii) capital deficit generated by new infrastructure is mainly covered by intergovernmental transfers and, to a lesser extent, by urban revenues. Overall, these findings suggest a moral-hazard problem for local governments in which undue intergovernmental transfers and urban revenues encourage them to excessively spread out.