The Spanish system of regional financing: a critical analysis and some reform proposals

We identify a number of elements of the current Spanish system of regional financing that do not conform satisfactorily to the principles of equity, autonomy and efficiency that should inspire its design. Our main conclusion is that although the system presents a series of shortcomings that would require an in-depth reform, its basic focus on the equalization of the service provision capacity of all regional governments should be preserved because it is in accordance with the constitutional guarantee of equal rights for all citizens and with notions of horizontal equity that are widely shared in our country. In fact, the main shortcoming of the system is, in our opinion, that it does not fully guarantee such equality in practice. Additional weaknesses of the system are its lack of transparency, the absence of mechanisms to maintain vertical equilibrium across the different levels of the administration and a significant deficit of fiscal autonomy and responsibility on the part of regional governments. Starting from this diagnostic, we provide a series of recommendations for reform that attempt to correct the system’s shortcomings.