A debt brake expenditure rule for the spanish regions

This paper proposes a new expenditure rule applicable to Spanish Autonomous Communities (ACs) that aims at achieving a predictable debt reduction path. The paper draws on existing contributions based on the "debt brake" concept, adapting them to the reality of Spanish ACs. Particularly, the proposal consists of an expenditure rule benchmarked against a projection of smoothed past AC revenues, adjusted by a debt-reduction parameter. The proposed rule presents feature that the literature of fiscal rule considers desirable, and addresses problems related to the application of the Spanish expenditure rule. Simulations show how this rule would limit expenditure growth and reduce Autonomous Communities’ debt against official rules, when applied over different time periods and considering a constellation of parameters relative to the debt adjustment and revenue-raising incentives.