Optimal public deficit and tax-smoothing in the Spanish Economy, 1850-2024

Emilio Congregado, Vicente Esteve, María A. Prats and Nicola Rubino

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: This paper tests the Tax-Smoothing Hypothesis (TSH) in Spain over a 174-year horizon (1850-2024). Using Dynamic OLS (DOLS) and a bivariate VAR framework, we examine the intertemporal relationship between public revenues and expenditures while accounting for structural instability. The results confirm a long-run cointegrating relationship, but with a tax-tilting parameter consistently between 0.85 and 0.91. This deviation reveals a structural “deficit bias”, where Spanish authorities have systematically postponed tax burdens through debt issuance. Multi-structural break analysis demonstrates that the TSH only becomes a robust framework following the institutional modernization of the mid- 20th century; earlier periods, marked by fiscal archaism and borrowing constraints, fail to conform to the model’s normative predictions. Furthermore, the VAR model confirms that while the budget balance responds rationally to expenditure shocks, its magnitude is heavily influenced by institutional shifts. We conclude that this persistent deficit bias is an embedded feature of the Spanish fiscal state, posing significant challenges for long-term sustainability within the Eurozone’s restrictive fiscal framework.

Keywords: España; gestión de la deuda pública; optimal taxation; public debt management; sesgo impositivo (Tax-tilting); Spain; suavizamiento fiscal (Tax-smoothing); Tax-smoothing; Tax-tilting; tributación óptima (search for similar items in EconPapers)
JEL-codes: F3 G3 J1 (search for similar items in EconPapers)
Pages: 36 pages
Date: 2026-08-31
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Published in Hacienda Publica Espanola, 31, August, 2026, 257(2), pp. 91-126. ISSN: 0210-1173

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