The role of fiscal coordination and partisanship in the Spanish fiscal federalist system

Abstract

ABSTRACT During the euro crisis, the sustainability of Spain’s debt burden was called into question. By 2019, however, Spain had successfully navigated its own crisis and reduced its debt burden. What role did Spain’s emerging fiscal federal system play in this recovery? We analyze the performance of Spain’s fiscal federalist framework and how it affected the country’s budgetary balance, with a special emphasis on its coordination and on political relationships within the autonomous regions. Contrary to what advocates of the benefits of fiscal coordination argue, we find that coordination does not prevent the erosion of fiscal discipline in regions. Our results show that politics, rather than fiscal rules and frameworks, play an important role and have led to differing fiscal performance. In regions where incumbents were re-elected, coordination is employed to ensure more positive budgetary balances. Conversely, in regions with changing incumbents, coordination serves as an indicator of future fiscal problems.