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Optimal Public Deficit and Tax-smoothing in the Spanish Economy, 1850-2024

Author

Listed:
  • EMILIO CONGREGADO

    (Universidad de Huelva)

  • VICENTE ESTEVE

    (Universidad de Valencia)

  • MARÃ A A. PRATS

    (Universidad de Murcia and European Institute, London School of Economics and Polictical Science)

  • NICOLA RUBINO

    (Universidad de Valencia)

Abstract

This paper tests the Tax-Smoothing Hypothesis (TSH) in Spain over a 174-year horizon (1850-2024). Using Dynamic OLS (DOLS) and a bivariate VAR framework, we examine the intertemporal relationship between public revenues and expenditures while accounting for structural instability. The results confirm a long-run cointegrating relationship, but with a tax-tilting parameter consistently between 0.85 and 0.91. This deviation reveals a structural “deficit bias†, where Spanish authorities have systematically postponed tax burdens through debt issuance. Multi-structural break analysis demonstrates that the TSH only becomes a robust framework following the institutional modernization of the mid20th century; earlier periods, marked by fiscal archaism and borrowing constraints, fail to conform to the model’s normative predictions. Furthermore, the VAR model confirms that while the budget balance responds rationally to expenditure shocks, its magnitude is heavily influenced by institutional shifts. We conclude that this persistent deficit bias is an embedded feature of the Spanish fiscal state, posing significant challenges for long-term sustainability within the Eurozone’s restrictive fiscal framework.

Suggested Citation

  • Emilio Congregado & Vicente Esteve & Marã A A. Prats & Nicola Rubino, 2026. "Optimal Public Deficit and Tax-smoothing in the Spanish Economy, 1850-2024," Hacienda Pública Española / Review of Public Economics, IEF, vol. 257(2), pages 91-126, June.
    • Handle: RePEc:hpe:journl:y:2026:v:257:i:2:p:91-126
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    References listed on IDEAS

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    Keywords

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    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus
    • O52 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Europe

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