Fiscal responsiveness to public debt: an analysis of the uncertainty of regional debt limits in Spain

Abstract

The present analysis addresses the primary balance response to the debt of the Spanish Autonomous Communities (ACs) from 1987 to 2015. Overall, the results of this study provide evidence on a nonlinear relationship, which point to a situation of fiscal fatigue and reduced fiscal space. The empirical framework builds mainly on the works of Bohn (1998) and Gosh et al. (2013), thereby focusing also on uncertainty issues. In 2015 the debt ratio stood at 26.8% of ACs’ Gross Value Added, slightly above our estimates for the lower limit (24%) and well below the upper limit (36%). These results have a backward-looking orientation, that is, fiscal reaction for the coming years is not necessarily determined by past behaviour. That being said, a reduced fiscal space of ACs calls for measures to ensure a sustainable debt trajectory and regain some room to deal with potential negative shocks.