Asymmetric decentralisation, economic cycle, regional and local government’s borrowing in Spain

This paper investigates the evolution of sub-central government borrowing in Spain over the period 1996–2011. The arguments and figures provided show that the intense process of political and fiscal decentralisation that took place over the 1990s and 2000s did not lead to higher debt ratios in terms of GDP at these tiers of government until 2007. Although a kind of overspending bias was in effect until the late 2000s, the paper shows that the evolution of GDP and tax revenues provided regional and local governments with enough resources to vigorously pursue their devolved public policy responsibilities and still keep their debt ratios under control. However, since 2008, when the world financial crisis broke out, the situation has changed dramatically. Even though the crisis originated in the financial sector, the paper concludes by stressing the importance of creating incentives and setting controls through institutional arrangements characterising multilevel government for all tiers of government to save in periods of economic growth in order to confront the impact of recession once it comes.