In a highly decentralized country such as Spain, meeting national commitments on deficit and debt depends on the sustainability of regional public finances. At present, the deficit target of each region is defined according to its GDP share over national GDP. Although this approach is reasonable at country level, it is not when there is a strong inter-regional equalization, as in Spain. The replacement of GDP by a budgetary magnitude would strengthen guarantees of regional financial sustainability. Hence, we propose a rule based on the use of non financial revenue and real budgets in order to avoid perverse incentives. Moreover, our proposal takes into account the debt stock of each region.

Key words: regional public deficit, budgetary stability, fiscal rules.
JEL Classification: H74.