Should fiscal equalisation and regional policy goals and tools be disentangled?

We exploit the mixture of policy goals and instruments of the Spanish regional funding system (RFS) to test whether equalisation transfers impact regional convergence. Using fixed effects and two-stage least squared estimation with instrumental variables (2SLS-IV) models and data for 15 regions for the period 2002-18, we find that both fiscal equalisation and regional transfers show a significant concave convergence-promoting effect, which is larger for regional transfers. However, funding excess/deficit caused by overlapping tools and objectives in the RFS does not have a significant relationship with regional convergence. These results are in line with the Tinbergen rule, since it is more cost-effective to promote regional convergence through regional policy funds.