Analysis of alternative proposals to reform the Spanish intergovernmental transfer system for municipalities

This paper offers an evaluation about the current design of the unconditional transfer system to the municipalities in Spain taking as a reference the precepts of fiscal federalism theory. The analysis carried out is based on the released results of the model during the period from 2004-2009, in which two different stages can be identified within the economic cycle; an expansive one up until 2007 and a recession period after that year. These data highlight that the design of the model along with the application of certain funding guarantees, have caused a disconnection between the evolution of the resources and the variables representative of need and capacity. Faced with this scenario, different reform alternatives are proposed with the aim of reconnecting the resources with these indicators. The potential impact of those proposals is evaluated using a simulation exercise in which the basic rule of status quo is assumed, i.e., that no municipality loses funding as a consequence of the new system