سرمایه گذاری کمک های مالی دولت مرکزی در قیمت های خانه محلی: شواهد داده های پنل از انگلستان

We explore the impact of central government grants on local house prices in England using a panel data set of local authorities (LAs) from 2001 to 2008. Electoral targeting of grants to LAs by the incumbent national government provides an exogenous source of variation in grants that we exploit to identify their causal effect on house prices. Our results indicate substantial or even full capitalization. We also find that house prices respond more strongly in locations in which new construction is constrained by physical barriers. Our results imply that (i) during our sample period grants were largely used in a way that is valued by the marginal homebuyer and (ii) increases in grants to an LA may mainly benefit the typically better off property owners (homeowners and absentee landlords) in that LA.

Most countries have a system for allocating public funds from the central (or federal) government to regional and/or local jurisdictions and for redistributing revenues from higher to lower income areas. Reallocation of financial resources among jurisdictions is not just ubiquitous but also hugely quantitatively important. For example, in the UK local authorities (LAs) receive roughly 60% of their funding from central government grants (the remaining funding comes from the council tax, fees and charges), making LAs highly dependent on central government decisions. Other centralized European countries have similar reallocation schemes. Although reallocation of higher level tax revenue to lower level jurisdictions may be comparably more important in more centralized economies, intergovernmental transfers are also hugely important in decentralized countries. For example, in the US, states' school finance equalization formulas reallocate significantly more money between school districts than the federal government spends on Medicare or on all federal income support programs combined. If fiscal grants for a particular area increase, for reasons other than an increase in production costs or service needs (i.e., a windfall gain1), a non-Leviathan local government has essentially two options. It can either increase service quality or decrease local tax rates (e.g., the council tax rate in England or the property tax rate in the United States). In both cases the area becomes more desirable and the demand for housing rises. To the extent that the supply side does not fully respond to the demand shock, the primary effect of the grant should be to increase the value of local land and the property that sits on it. Little is known empirically about whether, under what conditions and to what extent intergovernmental transfers, and in particular central government grants, are capitalized into property prices. In this paper we shed light on these questions by exploring whether the reallocation of financial resources from the British government to LAs is capitalized into house prices. Estimating the causal effect of grants on house prices is challenging because grants are allocated through formulae that include endogeneously determined characteristics of the LA, such as age structure and ethnic composition of the population. To overcome these endogeneity issues and identify the causal effect of grants on house prices we employ an instrumental variable strategy. We utilize strategic political considerations affecting grant allocation at the national level as a source of exogenous variation in grants. Our results based on panel data (over a period of 8 years between 2001 and 2008) and LA fixed effects as well as IV regressions suggest that an increase in the per-capita grant allocation indeed leads to higher house prices.2 Moreover, we find evidence on the positive dependence of the house price capitalization rate on physical constraints on housing supply (using elevation range measures).3 Our core estimates indicate that central government grants are roughly fully capitalized into property values. In a private rental housing market without strict rent controls, a grant-induced rise in value should be passed on to tenants in the form of higher rents. Thus, in areas with less than perfectly elastic housing supply, an increase in grants may mainly benefit typically well-off property owners, absentee landlords and homeowners, while leaving private renters indifferent. This mechanism may jeopardize any redistributive aims of the grant allocation system. Capitalization of central government grants may have a particular relevance in the light of the ongoing ‘credit crunch’ crisis. One consequence of this crisis is that public finances have come under enormous pressure in virtually all industrialized countries, not least in the United Kingdom. The crisis has also made it very transparent that public finances at all levels of government (national, regional and local) and housing markets are linked in complex and manifold ways. One consequence of the mounting pressure on public finances has been that governments across the globe are looking for novel and ingenious ways to raise additional revenue or cut spending to combat the growing budget deficits. In the UK in particular, the political pressure to reduce the country's enormous public debt and deficit is very strong. At the same time, the incoming Conservative/Liberal Democrat coalition government has fond plans to devolve central power to the local level. All these political pressures and intended policy reforms will likely impact in a fundamental fashion on the way the central government allocates resources to LAs over the coming years.4 These changes may well cause adjustment processes on local housing markets, which in turn may well have important distributional consequences. Our empirical findings that rely on past data imply that this is indeed likely.

Central government grants in the UK are allocated in such a way that LAs are compensated for fiscal burdens associated with unfavorable demographic and socioeconomic population compositions. However, our identification strategy unveils that this allocation has also been influenced by strategic political considerations, as the Labour party targeted grants to areas where it gained marginal dominance after local elections. This source of exogenous variation in grants represents a windfall type of grant, and our empirical findings suggest that increases in this windfall type of grant are roughly fully capitalized into house prices. Furthermore, the impact of grants on house prices appears to be stronger in locations in which new construction is constrained by physical barriers. One implication of our findings is that local governments appear to use grants in ways that are valued by the marginal homebuyer. There is little evidence to suggest that LAs spend their financial resources largely on self-interested bureaucracy. The May 2010 elections in the UK generated a very significant political change. The new coalition government of Conservatives and Liberal Democrats (which replaced the outgoing Labour government that was in power for 13 years) is likely to enact major policy changes that will lead to a significant reallocation of resources from the central government to LAs. Moreover, the political swing will likely lead to a reallocation of resources across LAs. This reallocation of resources represents a windfall type grant independent of whether the new grant system is closer to the ideal of compensating for local burden or not. Our findings imply that the changes at the local level will likely be capitalized into property prices. What are the policy implications of these changes? Property owners (homeowners and absentee landlords) will either significantly gain or lose, depending on whether they live in LAs that observe relative increases or decreases in grants. In contrast, assuming that windfall type grants increase rents as well as house prices, private renters should largely be unaffected by the changes (greater desirability is compensated by higher rents and vice versa).23 In other words, the grant system and changes in the allocation of grants generate substantial redistribution among property owners in different parts of the country, leaving (private) renters unaffected. More generally, our findings imply that the British grant system has substantial unintended consequences in that it generates massive redistribution of resources without helping the most disadvantaged individuals as well as the less fortunate in the most disadvantaged places. To illustrate this argument, consider for example an increase in the “Guns, Gangs and Knives” grant intended to help people living in disadvantaged areas/the inner city poor. Our findings imply that the possible crime prevention effects or lower taxes would increase house prices and rents in inner cities, which are largely populated by renters. Beneficiaries of the change are (the few) homeowners as well as landlords who own most of the inner city properties. Private renters would likely not benefit from the additional funding because they pay via higher rents for the benefits of the grant increase. Social renters may benefit to the extent that the grant increase does not affect their rents. One important implication of our findings is that from a welfare economics point of view policy makers should not use the grant system for redistributive purposes. While extra grants to ‘disadvantaged places’ are likely to improve local public services (and/or reduce local taxes) that at first glance benefit all local residents, the genuine beneficiaries of these improvements will mainly be the – typically better off – property owners in these places. Redistributive policies that help people directly are likely more effective; to the extent that people-based support is independent of the place of residence, it does not affect households' location choices and should therefore not be capitalized into housing rents or prices.24 In addition to the fact that the grant system has substantial unintended distributional consequences, the grants are financed at the national level to a large extent by income taxes,25 which are associated with significant deadweight losses — not least because they distort location choices by discouraging migration to high wage regions (Albouy, 2009).26 Our findings imply that support targeted directly towards disadvantaged people independent of their place of residence could, at least in principle, yield better distributional outcomes at potentially significantly lower costs. Such a reform that “helps people and not places” could contribute towards lessening the fiscal pressures that have been mounting during the ongoing economic and public finance crisis.