The Provision of Public Services under Conditions of Financial Stress: Evidence from Spanish Autonomous Communities

The 2008 economic crisis had three consequences for Spanish regional governments: first, there was a substantial and sudden fall of their revenue, which they had no effective means to redress, while citizens demands for education, health and other services continued to increase as usual; second, their debt, which until then had been relatively small and stable, exploded to unknown levels; and third, there was a serious deterioration of the extent and quality of the set of public services provided by these governments. The first two consequences show up quite clearly in official statistics, while the third, on which arguably there is a high level of consensus among citizens, has not been systematically and formally documented. This article develops a simple model of public expenditure that explains these facts. It suggests that, under conditions of financial stress, it may be rational for regional governments to spend more than the resources they have, and thus to incur in debt finance, and at the same time to accept a deterioration of the extent and quality of the services provided to the public. More concretely, the model predicts that, if a meaningful measure of the gap between expenditure needs and revenue can be identified, then the optimal behaviour of governments is to absorb a part of this gap by borrowing and the rest by letting service provision to deteriorate. In a situation of financial stress, along with the traditional influence of revenue, demography plays a role of its own in the determination of governments’ behaviour. We test these hypotheses with a panel of data on expenditure, revenue and a series of indicators of expenditure need (essentially demographic indicators) of the fifteen “common regime” Spanish autonomous communities over the period that goes from 2007 to 2017. None of the predictions of the model is rejected by the data.