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Spain’s property crisis puts municipal finances under pressure

Local authorities up and down the Spanish coast are heading into financial turbulence as muncipal revenues dry up with Spain’s property market slump. All property owners and residents will be affected, as town halls react by either putting up local taxes, cutting back on local services, or both.

Municipal financing is one of the biggest problems facing Spain today. The Spanish system for financing local governments forces town halls to rely heavily on revenues from building licences, which helps explain why so many town halls have been eager to cover their municipalities in concrete. As Spain’s property market deflates, and housing starts collapse from around 800,000 a year to less than 300,00, municipal revenues are set to take a beating.

Alfonso Rus, mayor of Xativa, and president of the national government’s delegation in the Valencian Region, estimates that municipal revenues in the Valencian Region could fall by an average of 50%, and by as much as 90% in some areas. Some say that the local authority of Castellon (Capital of the Costa Azahar) is already broke, whilst Benidorm, which pays 4 million Euros a year of interest on its debts, is cutting back services and activities.

As revenues from construction licences fall, town halls are likely to look for money wherever they can. Expect the local rates (IBI) to go up, along with water, rubbish, and other municipal fees. Alberto Fabra, mayor of Castellon, forecasts that direct local taxes will rise by 6% every year for the next 3 or 4 years. The mayor of Salamanca raised local taxes by 19% last year.

The municipal finance crunch will squeeze coastal towns the hardest, as construction fever during the boom raged the most on the coast. Rus has warned town councils in the Valencia Region to prepared for 3 “very difficult” years.

To make matters worse, local authorities are totally unprepared for a slump in revenues, even though the present situation could be seen coming a long way off. The growth model and urban planning model many employed was short termist and unsustainable, and failed to nourish long term wealth creation. Whilst the construction sector boomed, town halls used the revenues to finance a dramatic increase in municipal infrastructure and services that are now fixed costs that have to be paid. Increasing your fixed costs in response to a temporary rise in income is always a recipe for disaster.