The Political Economy of Inter-Regional Fiscal Flows
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The Political Economy of Inter-Regional Fiscal Flows

Measurement, Determinants and Effects on Country Stability

Edited by Núria Bosch, Marta Espasa and Albert Solé Ollé

Struggles over what a region receives, or should receive, from the budget of the central government are common to many countries. Discussions often focus on the measures of ‘net fiscal flows’ or ‘fiscal balances’ provided by the government or other actors. This unique book shows just how these flows are computed then interpreted and clarifies the often misunderstood economic and political motives that explain why some regions receive more monies than others.
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Chapter 10: The Political Rationale of Regional Financing in Spain

Sandra León


Sandra León 1 INTRODUCTION This chapter aims at uncovering the political logic behind the Spanish system of regional financing. More specifically, I attempt to account for the political rationale of two features of the Spanish system of regional financing: the allocation of intergovernmental transfers and the instability of regional financing. The basic argument is that in order to explain these features it is necessary to bring in two characteristics of the Spanish institutional structure: the changeable1 and asymmetric2 nature of the process of decentralization. This institutional context determines politicians’ incentives in designing fiscal intergovernmental arrangements.3 The chapter encompasses two different analyses. In the first one I will explore how increasing decentralization impacts upon the distribution of intergovernmental transfers. My hypotheses state that allocation strategies will vary over time: whereas in a centralized context, national politicians will have incentives to allocate more resources towards swing regions, in a more decentralized setting their allocation strategies will favour affiliated regional governments. As decentralization increases, central government politicians are less capable of reaping the electoral rewards from distributing intergovernmental transfers. Instead, electoral benefits increasingly leak towards empowered regional leaders. In consequence, as decentralization unfolds, national politicians modify their allocation strategies of intergovernmental grants to continue maximizing their electoral benefits. I then show empirical evidence on the Spanish case. Second, I will show that any central government attempt to commit to a design of intergovernmental transfers based on technical criteria is not credible. This commitment problem results in an unstable model of regional financing...

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