Within the framework of the soft budget constraint problem, this article investigates the
impact of a legislative reform that increased regional tax autonomy on the propensity of
Spanish regional governments to incur a deficit. For this purpose, a dynamic panel data
model is estimated, using data for the period 1984–2019. The sample shows a breakpoint in
2002, when the reform of the regional financing system came into force, providing Spanish
regions with greater tax autonomy, more fiscal competency, and lower intergovernmental
transfers. Results show that the budget constraint has hardened, as regions have fewer
incentives to accumulate budgetary deficits with the expectation of future compensations
from the central government. A comprehensive review of the evolution of other factors
previously identified as determinants of soft budget constraints, and the analysis of two
regions not included in this financing system, suggest no other possible explanation for
these results.
