On the Determinants of Fiscal Non-Compliance: An Empirical Analysis of Spain's Regions

Abstract

This paper proposes an empirical framework that distinguishes between voluntary and involuntary compliance with fiscal deficit targets on the basis of economic, institutional and political factors. The framework is applied to Spain’s Autonomous Communities (regions) over the period 2002-2015. Fiscal non-compliance among Spain’s regions has proven persistent. It increases with the size of growth forecasting errors and the extent to which fiscal targets are tightened, factors not fully under the control of regional governments. Non-compliance also tends to increase during election years, when vertical fiscal imbalances become accentuated, and market financing costs subside. Strong fiscal rules have not shown any significant impact on containing fiscal noncompliance. Reducing fiscal non-compliance in multi-level governance systems such as Spain’s requires a comprehensive assessment of inter-governmental fiscal arrangements that looks beyond rules-based frameworks by ensuring enforcement procedures are politically credible.

Keywords: fiscal compliance, rules, fiscal federalism, soft budget constraints

JEL Classification: H61, H68, H72, H77