The effects of capital grants to subnational governments under fiscal stress: evidence from the Spanish regions

Abstract

Purpose This paper aims to examine the impact of capital grants on the fiscal choices of Spanish regional governments from 1984 to 2021. Design/methodology/approach After running a battery of tests to verify the integration order of variables, joint cointegration and causality direction, the authors estimate a series of vector autoregressive models. Findings The results show that capital grants were highly effective until 2007, boosting capital expenditure and generating a significant crowding-in effect on capital expenditure in the long run. Then, the authors specifically analyze structural changes due to the deep impact of the Great Recession in Spain since 2008. However, the crowding-in effect still holds. Conditionality and matching rates are relevant elements of a sound definition of grant programs to subcentral governments. Originality/value The findings contribute significantly to the existing literature on fiscal federalism and regional economics.