Austerity and Households Expenditure

A sudden change of national government in Italy at the peak of the sovereign crisis in December 2011 brought about a sizable fiscal consolidation that unexpectedly re-designed the municipal tax on residential and non-residential properties: the 'IMU' tax. We exploit municipal variation (unrelated to the local business cycle) in the amount of IMU tax paid across respondents of the Survey on Household Income and Wealth (SHIW) to identify the causal effect of austerity on consumption over a range of specifications that control for demographics, income, house price, property characteristics and regional fixed effects. The marginal propensity to consume out of the overall IMU tax change is about 0.25 but the average effect masks significant heterogeneity. One euro of tax paid on the main dwelling led to a significant reduction in household expenditure of about 90 cents while taxes on other residential properties (whose revenues almost tripled those on the main dwellings) triggered a small and insignificant decline. The contraction was far more pronounced among home-owners with low liquid wealth, and was concentrated on the purchase of vehicles. The direct contribution of the IMU reform on residential properties to the aggregate economy in 2012 was around -0.3% of GDP (or -9.3% of vehicles sales) against the backdrop of a tax revenue increase close to 1.2% of GDP.