Jakob Suwalski and Giulia Branz (Scope Ratings) | Budget constraints faced by the autonomous regions make policy adjustments and new investments difficult. By the end of 2022, none of the regions met the 13% debt-to-GDP threshold in their fiscal framework, while the aggregate fiscal deficit worsened to 1.1% of GDP from 0.1% in 2021, contrasting with the reduction in the deficit of the general government, i.e. the central government plus local and regional governments. to 4.8% of GDP from 6.9% in 2021.
Temporary revenue weakness was partly to blame, as Spain’s tax equalisation system has a two-year lag in tax settlements, reflecting the fall in pandemic-related tax revenues in 2020. However, the autonomous communities have managed to make few significant cost savings in the aftermath of the pandemic. In a context of persistent inflation, autonomous communities responsible for essential services will have to reconcile voter pressure to improve the quality of health, education and social welfare with the need to contain costs.
The trade-off between boosting economic growth and safeguarding public finances, without weakening public services, is most acute in the autonomous communities with the least fiscal space, as they tend to be the ones that need to improve their economic attractiveness. The Valencian Community and Catalonia, the two least competitive regions according to the Regional Fiscal Competitiveness Index, are the ones with the highest debt.