Tax autonomy mitigates soft budget constraint: evidence from Spanish Regions

Abstract Within the framework of soft budget constraint problem, this article investigates impact a legislative reform that increased regional tax autonomy on propensity Spanish governments to incur deficit. For purpose, dynamic panel data model is estimated, using for period 1984–2019. The sample shows breakpoint in 2002, when financing system came into force, providing regions with greater autonomy, more fiscal competency, and lower intergovernmental transfers. Results show has hardened, as have fewer incentives accumulate budgetary deficits expectation future compensations from central government. A comprehensive review evolution other factors previously identified determinants constraints, analysis two not included system, suggest no possible explanation these results.