The Impact of Soft Budget Constraint on the Fiscal Co-responsibility of the Autonomous Communities in Spain: The Case of Extraordinary Liquidity Funds (2012-2019

Santiago Calvo () and María Cadaval ()
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Santiago Calvo: Universidad de Santiago de Compostela
María Cadaval: Universidad de Santiago de Compostela

Hacienda Pública Española / Review of Public Economics, 2022, vol. 240, issue 1, 151-190

Abstract: According to the Second Generation of Theories of Fiscal Federalism, if subcentral governments can increase the level of spending without taking responsibility for the cost due to the existence of a soft budget constraint, incentives are created for financially irresponsible behavior. Since 2012, the central government in Spain has created various funds with the aim of improving the liquidity of the Autonomous Communities, but their design has meant that the latter can obtain resources at little cost. This paper tests the hypothesis under which the regions that have received more extraordinary liquidity funds have had a less prudent fiscal behavior, finding no evidence of it. The level of unemployment, the financial insufficiency and the electoral cycle of the budget are the determining factor in explaining greater non-compliance with deficit and debt targets and higher deficit and debt growth rates.

Keywords: Soft budget constraint; Regional financing; Autonomous Communities; Extraordinary liquidity funds (search for similar items in EconPapers)
JEL-codes: H63 H74 H77 (search for similar items in EconPapers)
Date: 2022
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