Public Finance Behavior of the Spanish Regions : An Analysis Based on Fiscal Reaction Functions

The need to be compliant with the fiscal frameworks of the European Union and Spain has generated asymmetric fiscal behavior across the Spanish government tiers regarding the distribution of the needed fiscal efforts to pursue public finance sustainability and macroeconomic stability in the medium-to-long term and to meet citizen needs in the short term. In this paper, we focus on the determining factors accounting for the budget deviations for the Spain's Autonomous Communities (regions). For this purpose, we analyze the discretionary fiscal behavior of the Spanish regional administrations by estimating panel-data and time-series specifications of a dynamic fiscal reaction function à la Bohn (1998; 2005) for 17 Spanish regional governments over the period 2003–2015 within a Markov-switching methodology. According to our results, the discretionary fiscal behavior of the Spanish Autonomous Communities manifested switching properties throughout the last ten years or more, uncovering the existence of two fiscal regimes that shift in accordance with lagged budget balance and public debt levels, as well as business cycles. Except for some notable cases, the Spanish regional authorities did not commit to meeting the public deficit and debt limits (“active” fiscal behavior), and/or engaged in overheating the territorial economies (“procyclical” fiscal behavior) in at least one regime