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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

Author

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  • Santiago Calvo

    (Universidad de Santiago de Compostela)

  • María Cadaval

    (Universidad de Santiago de Compostela)

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.

Suggested Citation

  • Santiago Calvo & María Cadaval, 2022. "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," Hacienda Pública Española / Review of Public Economics, IEF, vol. 240(1), pages 151-190, March.
    • Handle: RePEc:hpe:journl:y:2022:v:240:i:1:p:151-190
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    References listed on IDEAS

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    More about this item

    Keywords

    Soft budget constraint; Regional financing; Autonomous Communities; Extraordinary liquidity funds;
    All these keywords.

    JEL classification:

    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
    • H74 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Borrowing
    • H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism

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