Fiscal policy responses to changes in the cyclical position of the Autonomous Communities. An empirical analysis

Abstract

This paper analyses the responsiveness of Spanish ACs (Autonomous Communities) fiscal policy to changes in the cyclical position as well as to other determinants such as institutional and political economy features. ACs fiscal policy is countercyclical despite surpluses in expansions do not offset deficits in downturns. However, we cannot infer an asymmetric reaction of Spanish ACs fiscal policy to the cycle. Results also suggest that as education and health were devolved ACs primary budget balance (PBB) worsened, which may be indicative of underfunded responsibilities. We also identify a significant effect of relative fiscal resources of ACs financing system on PBB, which should be taken into account as there have been great disparities. In addition, there is a strong inertial component in ACs PBB, and legislative fiscal rules and fiscal corresponsibility present a positive effect on PBB until the latest global financial crisis. Lastly, it should also be noted that the fiscal stance of ACs worsens the year before elections.