Politics Versus Economics: The Case of Spanish Regional Financing

The relationship between fiscal autonomy and regional economic outcomes is a critical question in political science and the study of federalism. This article examines how Spain’s asymmetric fiscal system has shaped regional inequality, focusing on two opposing cases: the Basque Country, which enjoys significant fiscal autonomy through the 2002 Basque Economic Agreement, and the Valencian Community, persistently underfunded under the 2001 common financing model. While political justifications for asymmetric federalism are well-documented, the long-term economic consequences remain less explored. By analyzing these landmark fiscal arrangements, we provide evidence that asymmetric fiscal autonomy can exacerbate regional disparities. Our findings demonstrate that the Basque Country’s fiscal autonomy significantly boosted gross domestic product per capita, while the Valencian Community’s underfunding led to notable economic decline. These findings contribute to political debates on the tensions between territorial politics and economic equity, offering lessons for multilevel systems seeking to balance regional autonomy with economic cohesion.