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This paper estimates the GDP impact of legislated tax changes in Spain using a newly constructed narrative record for the period 1986-2015. Our baseline estimates suggest that a 1% of GDP increase in exogenous taxes depresses output by around 1.3% after 1 year, this negative effect fading away at more distant horizons. We also find that the effects of changes in indirect taxes are larger and that, following a tax increase, investment reacts more than consumption. Overall, our set of estimates is consistent with negative output effects triggered by tax increases, yet the quantitative effects are subject to non-negligible uncertainty that is reflected in wide confidence bands, in line with the extant literature for other countries.

Spain's public finances have been under significant stress during the financial crisis, despite pre-crisis fiscal surpluses and low levels of public debt. The impact of the crisis and an initial phase of countercyclical activism exacerbated the existing (structural) fiscal vulnerabilities. To correct the fiscal imbalances, a significant number of bold policy actions were taken, affecting taxation, public spending, national fiscal rules and the structure of the public sector. In this paper, we discuss the evolution of the public finances in Spain through the financial crisis, framing crisis-related fiscal policy measures within mediumterm economic trends and focusing on policy responses to the crisis. We also touch upon the main policy challenges ahead. Policy pointsr At moments of substantial fiscal stress, a strong policy response is a must for reversing adverse public finance trends and regaining normal market * 528 Fiscal Studies access, even under unfavourable macroeconomic conditions. Limited policy action or an excess of fiscal activism when information is limited may compromise the sustainability of the welfare state.r Enacted structural fiscal reforms -particularly those affecting fiscal rules, public pensions and the organisation of the public sector -have to be implemented in a time-consistent manner, in order to support economic stability and to create room for the normal conduct of fiscal policies. Good economic times could be used to design a more efficient and growthfriendly tax system. r Side effects of on-the-run fiscal retrenchment measures in Spain may have included the appearance of bottlenecks in the provision of certain key public goods and services (in the areas of education and health, for example) or the discontinuation of socially-relevant programmes. A deep spending review could be instrumental for redressing public spending priorities.r The legacies of the financial crisis, in the form of high levels of public debt and yet-to-be-solved macroeconomic imbalances, advise prudent fiscal policymaking in the near term.

This paper estimates the GDP impact of legislated tax changes in Spain using a newly constructed narrative record for the period 1986-2015. Our baseline estimates suggest that a 1% of GDP increase in exogenous taxes depresses output by around 1.3% after 1 year, this negative effect fading away at more distant horizons. We also find that the effects of changes in indirect taxes are larger and that, following a tax increase, investment reacts more than consumption. Overall, our set of estimates is consistent with negative output effects triggered by tax increases, yet the quantitative effects are subject to non-negligible uncertainty that is reflected in wide confidence bands, in line with the extant literature for other countries.

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