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The housing net worth channel and the public finances: evidence from a European country panel

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Abstract

In the growing literature on the importance of household balance sheets to macroeconomic developments, the relationship between housing wealth and fiscal outturns needs consideration given the likely links between housing market developments and particular tax headings. We adopt the housing net worth model for this purpose. Using a panel dataset of 18 European countries over the period 1998 to 2017, we find changes in housing net worth having a significant impact on the primary budget balance, with increases (decreases) in housing net worth causing the budget balance to improve (dis-improve). Further support for the importance of this channel to the public finances arises by differentiating observations based on the amount of revenue raised under particular tax headings.

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Fig. 1
Fig. 2

Source: OECD. See https://stats.oecd.org/Index.aspx?DataSetCode=RS_GBL for more details

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Notes

  1. By reference to financial liberation in Finland in the late 1980s, Oikarinen (2009) notes the tight connection between house prices and household borrowing and how greater availability of credit likely leads to a higher demand for housing, while house prices can influence household borrowing through various wealth effects. Such interaction can exacerbate boom–bust cycles and raise the fragility of the banking sector.

  2. Household net worth, as a percentage of net disposable income, is sourced from https://data.oecd.org/hha/household-net-worth.htm.

  3. See https://ec.europa.eu/economy_finance/ameco/user/serie/SelectSerie.cfm.

  4. See https://stats.oecd.org/Index.aspx?datasetcode=SNA_TABLE9B_ARCHIVE#.

  5. See https://www.bis.org/statistics/pp_detailed.htm?m=6%7C288%7C593.

  6. The General Government primary budget balance and output gap (mentioned below) data are both sourced from the EU AMECO database.

  7. Those eighteen countries are Austria, Belgium, Czech Republic, Denmark, Finland, France, Germany, Hungary, Italy, Latvia, Lithuania, Luxembourg, the Netherlands, Poland, Portugal, Slovakia, Slovenia and Sweden. The panel of data is unbalanced as there are not observations for all countries between 1998 and 2017. Further specifics on the data sample are included in the appendix.

  8. F-tests of the joint significance of the fixed effects are reported at the bottom of each column. The p-values reported in the tables strongly reject the null hypothesis that the cross-sectional effects are redundant throughout.

  9. The weighting uses the residual variances from the initial panel data estimator and a robust errors estimator that computes regression standard errors and covariance matrix allowing for heteroscedasticity. See Leamer (2010) and Romano and Wolf (2017) for more on applying weighted least squares.

  10. This specification is somewhat similar to that of Addison-Smyth and McQuinn (2010, 2016) who examined the role played by changes in Irish house prices on different Government taxation aggregates.

  11. Being a dynamic panel model, the Arellano–Bover/Blundell–Bond model already has a lagged dependent variable in the specification.

  12. We use these tax revenues as a percentage of GDP as a proxy for the particular tax rates that arise in each country for each relevant tax heading.

  13. The regressions in Table 4 were also estimated by weighted least squares with no material differences in the results arising.

  14. High-tax observations are predominantly associated with western European countries rather than central or European countries, pointing to the HNW channel being more influential on budget outturns in ‘old’ Europe.

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Acknowledgements

The authors would like to thank a referee for his/her comments.

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  1. Central Bank of Ireland, Dublin, Ireland

    David Cronin & Kieran McQuinn

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  1. David Cronin
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Correspondence to David Cronin.

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Appendix: Data coverage

Appendix: Data coverage

See Table 5.

Table 5 Data coverage for each country
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Cronin, D., McQuinn, K. The housing net worth channel and the public finances: evidence from a European country panel. Int Tax Public Finance 30, 1251–1265 (2023). https://doi.org/10.1007/s10797-022-09751-z

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