The Spanish Sovereign Debt Crisis: The Impact of Politics on Fiscal Outcomes in Subnational Governments

This thesis investigates fiscal policies of subnational governments in Spain, a country whose regions are currently mired in a crisis of solvency. Many pre vious studies have suggested that political factors play an important role in determining deficits, spending, and debt. This paper examines the effect of such political factors as the party in power, the electoral cycle, the competitiveness of regional politics, and the degree of autonomy a region has, on fiscal outcomes, especially discretionary spending. The results show that much of the variation in fiscal outcomes can be explained by economic factors. However, some of the political factors are also relevant. The competitiveness of regional politics, especially whether the regional government is a coalition, or has just come to power, does affect fiscal outcomes, though not always as previous literature has found. Certain aspects of the Spanish system, like transfers from the federal government to regional governments, are also significant, in most cases in accordance with the literature. However, while this paper examines specifically what affects discretionary spending, here the results are less conclusive, and more work may be needed to determine not only what affects discretionary parts of spending, but what makes certain programs discretionary or non-discretionary.