Demographic change in Castilla y León is placing pressure on public finances, investment, and governance. Ageing and depopulation are driving up healthcare costs and weakening the revenue base, threatening long-term fiscal sustainability. While core areas like health and education have seen sustained investment, functions linked to place attractiveness, such as housing and culture, remain underfunded. Public investment levels are relatively high but not always aligned with demographic needs. Municipal fragmentation and limited strategic co-operation hinder service efficiency, while governance responses remain fragmented despite strong political commitment and action.
Preparing for Demographic Change in Castilla y León, Spain
Abstract
Demographic change poses multifaceted fiscal and governance challenges for Castilla y León. From 1990 to 2023, the region lost 7% of its population, while the average OECD region grew by 27% over the same period. The working-age population is shrinking, while the share of those aged 65 and over is rising rapidly (OECD, 2025[1]). In 2023, the region had the second-highest old-age dependency ratio in Spain (43 people aged 65+ for every 100 working-age residents), well above the national average of 31 and the OECD TL2 regional average of 28 (Eurostat, 2025[2]). These demographic trends are expected to intensify in the coming decades, threatening to erode the tax base, increase per capita service delivery costs, and place growing pressure on regional and municipal budgets.
In Castilla y León, demographic pressures are compounded by territorial fragmentation and uneven spatial development. The region’s more than 2 200 municipalities, many with small and ageing populations, face persistent administrative and fiscal constraints. This limits their ability to deliver services efficiently, maintain infrastructure, and provide the housing, transport, and job opportunities needed to attract and retain residents. Despite strong education outcomes, many young people leave the region due to limited local employment prospects, lack of affordable housing, and insufficient connectivity. This outmigration of youth and skilled workers is eroding the region’s talent pipeline, weakening local economies, and making it harder to renew the public sector workforce. Addressing these challenges will require adapting multi-level governance frameworks, aligning public investment with demographic and territorial needs, and strengthening the capacity of municipalities to plan, deliver, and innovate.
This chapter assesses the fiscal and governance implications of demographic change in Castilla y León and outlines actionable policy responses. It begins by assessing the impact of demographic change on subnational government finances. It then examines the alignment of public investment priorities with demographic trends and explores how investment strategies can better respond to evolving needs. The chapter also considers how governance frameworks may be affected by demographic change. The chapter concludes by offering short-term and longer-term policy recommendations to adapt Castilla y León’s public finances, investment strategies, and governance structures to ensure long-term resilience against demographic change
Demographic trends are already reshaping the subnational public finance landscape in Castilla y León. An ageing population is driving up demand for healthcare and long-term care services, contributing to rising per capita expenditure – particularly in rural areas, where service delivery costs are higher. At the same time, structural fiscal imbalances are emerging, as demographic decline reduces the size of the working-age population and erodes the region’s revenue base. Castilla y León’s reliance on intergovernmental transfers and EU funding further compounds its fiscal vulnerability. Looking ahead, demographic change is expected to place growing pressure on both expenditure and revenue. These dynamics risk widening the gap between revenue and spending, raising concerns about the long-term sustainability of subnational public finances.
To assess these challenges, this section first examines the impact of demographic change on regional government finances, focusing on the effects on revenue and expenditure, and the long-term implications for regional government debt. The second part of the section explores briefly how these demographic trends affect municipal finances, highlighting key fiscal pressures and sustainability challenges at the local level.
Health, education and economic affairs account for the bulk of regional expenditure in Castilla y León
Castilla y León’s expenditure profile is shaped by its status as a regional government and reflects both its core functional responsibilities and the demographic pressures it faces (Figure 4.1). Unlike national subnational government (SNG) averages in Spain, which combine data from both local and regional levels, Castilla y León’s figures reflect only the regional tier. As a result, spending is concentrated in functions for which the region holds direct responsibility, while functions typically managed by local governments – such as public safety, housing, and culture – are underrepresented. In 2021, the region allocated 41.7% of its subnational budget to health, significantly above both the Spanish SNG average (27.7%) and the OECD average (19.3%). This reflects Castilla y León’s institutional mandate for healthcare delivery, a core regional competence in Spain. Education accounted for 22.6% of expenditure, again higher than the national average (17.6%) and broadly in line with the OECD (22.7%), reflecting the region’s significant role in managing schools and education infrastructure.
By contrast, general public services (10.9%), public order and safety (0.7%), recreation, culture and religion (1.4%), and housing and community amenities (0.3%) receive a far smaller share of the budget. These figures compare starkly with national averages at the local level, where, for example, public order and safety accounts for 7.2% of spending and recreation and culture for 10.6%, highlighting the predominance of municipal provision in these areas.
The regional expenditure profile also underscores structural vulnerabilities. Castilla y León demonstrates a strong focus on ageing-related services, notably healthcare, in line with demographic pressures. Yet, it invests only limited amounts in functions that contribute to well-being, community vitality, and territorial cohesion. These include housing and community amenities (0.3%), recreation, culture and religion (1.4%), public order and safety (0.7%), and environmental protection (2.5%). This underinvestment may constrain the region’s ability to retain and attract younger populations, particularly in rural areas affected by population decline, and may limit its capacity to support place-based development strategies aimed at demographic renewal.
Regional and subnational government expenditure by functional classification (% of total expenditure 2021)
Growth in functional public expenditure reflects demographic priorities but reveals functional imbalances
Between 2012 and 2023, Castilla y León’s real per capita expenditure increased across most functional categories, particularly in health, education, and environmental protection (Figure 4.2). These trends reflect rising public demand, demographic pressures, and continued investment in the region’s core service mandates. Health spending grew from EUR 1 387 to EUR 1 741 per capita, maintaining its position as the region’s largest area of expenditure. Its share of regional GDP remained consistently high and ranged from 6.5% to 7.5%, demonstrating the centrality of healthcare within Castilla y León’s budget. This trajectory reflects both the region’s demographic ageing and its institutional responsibility for healthcare delivery. Education spending also rose steadily over the period, reaching nearly EUR 970 per capita in 2023. Despite a declining school-age population in many parts of the region, education’s share of GDP remained stable at around 4%, indicating a continued commitment to investment in human capital. Spending on environmental protection more than doubled in per capita terms from EUR 60 in 2012 to nearly EUR 148 in 2023. Although its overall weight in the budget remains modest, its share of GDP increased from 0.3% to 0.4%. In contrast, investment in functions such as recreation, culture and religion, housing, and public order and safety remained consistently low. For instance, public order and safety accounted for just EUR 6 per capita in 2023, or less than 0.03% of GDP, while housing and community amenities fell to EUR 19 per capita (0.07% of GDP), after peaking briefly in 2019. These functions, although central to place attractiveness and local quality of life, represent only a marginal share of both total spending and GDP.
Per capita expenditure by function and GDP per capita in Castilla y León, 2012-23
Note: Constant 2015 prices
The composition of spending growth between 2012 and 2023 further reveals shifts in functional priorities (Figure 4.3). The largest increase in real per capita terms occurred in environmental protection (+147%), followed by social protection (+57%) and public order and safety (+33%). While environmental protection grew substantially, this change started from a low base and the function continues to represent a modest share of overall expenditure. Similarly, spending on recreation, culture and religion increased by just 5% over the period and remains a minor budget item. By contrast, core service areas, including health (+26%), social protection (+57%), and education (+14%) recorded significant growth, confirming their status as the pillars of regional expenditure. These functions together account for the bulk of the regional budget and have been the primary focus of investment during the past decade. On the other hand, spending on housing and community amenities declined by 35%, and general public services fell by more than half (-54%). These reductions suggest a growing imbalance in the spending structure, with potential consequences for the region’s ability to deliver place-based services and respond to complex demographic challenges.
Real percentage change in per capita subnational expenditure by function, Castilla y León, 2012–2023 (constant 2015 euros)
Source: OECD calculations based on (Ministry of Finance Spain, n.d.[4])
Population ageing is set to intensify health-related expenditure pressures
With the elderly population expected to increase significantly, health expenditure, which has already been rising, is projected to grow even more sharply in the future. Almost all provinces in Castilla y León are expected to age more than the EU average, with the old-age dependency ratio increasing steadily across the region (Figure 4.4). An increase in the old-age dependency ratio is anticipated to lead to higher healthcare expenditures as a share of GDP, as healthcare costs tend to be more substantial for the elderly, whilst the shrinking working-age population will result in fewer contributors to finance this rising cost. Healthcare spending is projected to increase by approximately 2% points of regional GDP by 2080. If the projections consider the need to improve the quality of healthcare by assuming that Castilla y León increases its level of expenditures for the elderly to average levels in the OECD, even further increases in healthcare can be expected.
Projected healthcare expenditure as a share of regional GDP, 2020–2080 (Panel A). Observed and projected old-age dependency ratio, 2014–2080 (Panel B)
Note Panel A: The status quo scenario fixes the population and its age composition in 2021. See Annex 1.A. for baseline analysis. Population projections and health expenditure age profiles are used to assess how changes in the old-age dependency ratio impact heath expenditures. Output projections use population projections for labour input and assume constant growth in total factor productivity at its historical average and capital accumulation following the balanced-growth condition (see Annex 1.A. for further details). The status quo scenario assumes the population composition is fixed at 2021. The baseline scenario uses baseline population projections provided by Eurostat and holds other parameters constant. The “Increase elderly care” scenario modifies the baseline scenario by assuming that per capita healthcare costs for the elderly relative to the working-age population achieve OECD average levels in 5 years.
Note Panel B: The old-age dependency ratio is defined as the number of people aged 65 and over relative to those aged 15 to 64. Data for 2014–2023 are historical; projections start from 2024.
Source: OECD calculations based on (INE, 2025[5]) (Eurostat, 2025[2]) (Maisonneuve and Martins, 2013[6]),
Demographic change is intensifying structural pressures on Castilla y León’s regional revenue streams
The revenue structure of Castilla y León reflects a strong dependence on shared taxes and external transfers. In 2023, indirect taxes were the largest single source of revenue for the region, amounting to approximately EUR 3 178 per capita, or 27.5% of total revenue (Figure 4.5). These include value-added tax (VAT) and excise duties on goods such as fuel, tobacco, and alcohol, which are collected by the central tax agency and partially redistributed to the Autonomous Communities (ACs) based on statutory formulas. Current transfers, which include central government allocations and EU funds, followed closely at EUR 3 034 per capita, representing 26.3% of total revenue. Direct taxes, such as personal income tax (PIT), wealth and inheritance taxes, and corporate income taxes, generated EUR 2 595 per capita (22.5%). Other revenue streams were more marginal. financial operations (such as asset sales and borrowing) made up 11.2% while Capital transfers accounted for 10.8% of total revenue in 2023. Fees, public charges, and property income together represented less than 2% of revenue.
Subnational revenue by category in Castilla y León, 2017–2023, per capita, constant 2015 euros
The regional tax mix remains dominated by centrally shared taxes
Between 2020 and 2024, income tax and value-added tax (VAT) consistently represented the two largest sources of regional tax revenue in Castilla y León, highlighting the region’s reliance on assigned taxes shared with the central government. In 2024, income tax accounted for nearly EUR 2 695 per capita, showing sustained growth from EUR 2 071 in 2020 (Figure 4.6). VAT revenue also increased over the period, reaching EUR 2 101 per capita, despite temporary declines during the COVID-19 crisis. Consumption taxes, capital taxes, and property transfer taxes made more modest contributions. For instance, consumption taxes generated EUR 804 per capita in 2024, and property transfer taxes fluctuated with real estate cycles, peaking at EUR 331 in 2023.
Breakdown of direct and indirect tax revenue by type, 2020–24 (EUR per capita, constant 2015 prices)
Note: Data for 2024 are projections.
Castilla y León’s tax mix reflects the structure of Spain’s decentralised tax system. Under Article 133 of the 1978 Constitution, the central government retains primary taxing authority, but regions benefit from assigned taxes and may introduce their own within defined constitutional and legal limits. Assigned taxes – such as personal income tax (PIT), VAT, and excise duties – are collected centrally and partially shared with the Autonomous Communities (ACs). For instance, ACs receive 50% of PIT and VAT revenues and 58% of excise taxes. A key reform in 2009 (Law 22/2009) expanded regional tax powers, granting ACs discretion to adjust PIT exemptions, brackets, and rates, and to introduce new taxes in unregulated areas. In Castilla y León, own-source taxes include inheritance and gift taxes, property transfer taxes, gambling and vehicle taxes, as well as surcharges on national taxes such as PIT and tobacco duties. While these reforms have strengthened the fiscal autonomy of ACs, Castilla y León still operates within a framework heavily shaped by centrally managed tax bases and intergovernmental transfers. This structure may limit the region’s ability to tailor its revenue system to local needs and demographic pressures.
Intergovernmental transfers remain the cornerstone of regional budgets but face increasing demographic pressure
Total transfers, including both current and capital transfers, are a cornerstone of Castilla y León’s regional finances. In 2023, total transfers amounted to approximately EUR 4.28 billion, representing 37.5% of the regional budget and 15.5 % of Castilla y León’s GDP. According to the OECD classification of subnational finance, all tax revenues collected by the central government and redistributed to subnational governments, such as shared personal income tax and VAT, are recorded as grants. When applying this approach, total grants represent nearly 70% of Castilla y León’s regional revenue, equivalent to 28.5% of GDP, underscoring the region’s structural reliance on national and European sources.
Zooming in on current transfers, these represent a critical and relatively stable revenue stream, amounting to EUR 3.42 billion in 2024, up from EUR 2.70 billion in 2020 (Figure 4.7). After peaking at nearly EUR 4 billion in 2022, likely due to post-pandemic fiscal responses, they stabilised around EUR 3.3-3.4 billion in the following years. Most of these transfers come from the General State Administration, which provided EUR 2.64 billion in 2024. This includes several key components of Spain’s fiscal equalisation system, designed to ensure that all Autonomous Communities (ACs), regardless of their fiscal capacity, can provide comparable levels of public services. The Fund for the Guarantee of Fundamental Public Services is the largest of these instruments, with allocations rising to EUR 1.24 billion in 2024. It aims to guarantee minimum funding for core services such as health, education, and social protection. The Global Sufficiency Fund, which provides supplementary resources to ACs that cannot generate adequate revenues to meet expenditure needs, contributed EUR 528 million. Convergence Funds, intended to reduce territorial disparities and promote regional development, added EUR 279 million. Together, these three instruments accounted for 78% of all transfers from the General State Administration in 2024. Meanwhile, transfers from the European Union have remained relatively stable in real terms, averaging around EUR 850 million annually before dipping slightly to EUR 774 million in 2024, or around 3.2% of regional GDP in 2024. These are overwhelmingly driven by Common Agricultural Policy (CAP) payments, which represented over 99% of EU current transfers in most years, with modest contributions from ERDF and other unspecified sources.
Breakdown of current transfers by category, 2020–2024 (EUR million, 2015 prices)
Although the fiscal equalisation system plays a vital role in sustaining regional service delivery in Castilla y León, it faces growing pressure due to demographic trends. The region has one of the highest old-age dependency ratios in Spain, contributing to rising demand and per capita costs in health and social care. However, the current equalisation formulas do not fully account for the additional fiscal burden of ageing and rurality. This challenge is compounded by Castilla y León’s heavy dependence on intergovernmental transfers, which makes it vulnerable to shifts in national policy and EU funding eligibility. As its GDP per capita rises relative to the EU average, the region may face reduced access to EU structural funds in future programming periods, potentially limiting resources available for addressing territorial imbalances and demographic decline.
Demographic pressures increase long-term risks to regional debt sustainability and fiscal balance in Castilla y León
Public spending in Castilla y León has consistently outpaced revenues in recent years, even when adjusted for inflation. Between 2020 and 2024, real expenditure increased from EUR 9.8 billion to EUR 11.4 billion, while real revenue rose from EUR 8.7 billion to just over EUR 10 billion (Consejo Económico y Social de Castilla y León, 2023[7]). The gap widened particularly in 2022, likely reflecting counter-cyclical spending in response to the COVID-19 crisis. While both revenue and spending have stabilised since, the persistent structural imbalance may pose fiscal sustainability challenges, especially as demographic pressures intensify.
Castilla y León’s debt dynamics reflect the increasing fiscal pressures associated with demographic change. Between 2012 and 2024, the region’s per capita debt rose from EUR 3 141 to a peak of EUR 5 809 in 2023, before a modest reduction to EUR 5 792 in 2024 (Figure 4.8). The debt-to-GDP ratio followed a similar trend, rising from 14.9% in 2012 to 23.4% in 2020, largely driven by the economic effects of the COVID-19 pandemic, before falling to 18.8% in 2024. Although the region’s debt-to-GDP ratio remains below the national average, its slower post-pandemic recovery highlights underlying economic vulnerabilities. These vulnerabilities are compounded by structural demographic changes, most notably, population ageing and depopulation in rural areas, which may constrain economic output, reduce the tax base, and increase per capita costs of public service delivery (OECD, 2022[8]). Indeed, Castilla y León has consistently maintained higher per capita debt levels than the national average, indicating more limited fiscal space to respond to demographic pressures.
Regional per capita debt and as a share of GDP, 2012-24, constant prices
Note: Data at 30 June 2024
Projections of Castilla y León’s fiscal balance highlight significant challenges linked to demographic change. Under the baseline scenario, which assumes the continuation of current demographic trends, the fiscal balance is projected to deteriorate by approximately three percentage points of GDP by 2050 compared to a fixed 2021 demographic structure (Figure 4.9). This decline reflects the combined effects of lower revenue growth, driven by an ageing population and shrinking workforce, and rising expenditure demands. In a more severe scenario, where increased levels of care for the elderly are factored in, the deficit is expected to widen further, exceeding four percentage points of GDP by 2050. These projections underscore the urgency of addressing demographic-driven fiscal pressures through a balanced approach that includes managing expenditure – such as by promoting healthy ageing to moderate future demand – and strengthening revenue capacity. Ensuring long-term fiscal sustainability will require a combination of efficiency measures, well-targeted investment, and reforms that adapt both sides of the fiscal equation to evolving demographic realities.
Note: Output projections use population projections for labour input and assume constant growth in total factor productivity at its historical average and capital accumulation following the balanced-growth condition. The fiscal balance is presented in comparison to the fiscal balance of the status quo scenario which assumes the population composition is fixed at 2021. The “Increase elderly care“ scenario modifies the baseline scenario by assuming that per capita healthcare costs for the elderly relative to the working-age population achieve OECD average levels in five years.
Demographic change is intensifying pressures on local government finance
Demographic change has significant implications for the structure and sustainability of local government finance in Castilla y León. As the region experiences population ageing and depopulation – particularly in rural and remote municipalities – pressures are mounting on both the expenditure and revenue sides of local budgets. This section explores how local governments are adapting their spending patterns and managing revenue challenges in light of these demographic trends.
Local government expenditure prioritises core public services, administration, and infrastructure
In 2023, local governments in Castilla y León executed approximately EUR 3.8 billion in consolidated expenditure, equivalent to around 34.2% of the regional budget of Castilla y León (EUR 11.1 billion) (Figure 4.10). This corresponds to roughly 6.5% of the region’s GDP. Spending is primarily concentrated in two functional areas: basic public services (EUR 1.2 billion) and general administration (EUR 902 million), which together represent more than half of total local government expenditure. Other significant spending categories include social protection and promotion actions (EUR 541 million), production of preferential public goods such as education and culture (EUR 589 million), and economic actions (EUR 429 million). From an economic classification perspective, current expenditure on staff and goods and services dominates, jointly accounting for over 71% of total expenditure. Investment expenditure, including both real investments and capital transfers, makes up a substantial share in sectors such as basic public services and general administration, highlighting efforts to maintain and upgrade local infrastructure and service delivery capacity.
Economic and programme classification of consolidated local government expenditure in Castilla y León, 2023
Smaller municipalities in Castilla y León face disproportionately high costs to deliver basic services, reflecting greater fiscal vulnerability and lower economies of scale (Figure 4.11). Municipalities with fewer than 100 inhabitants have the highest per capita expenditure (EUR 3= 393), highlighting their higher costs to provide basic public services. However, collectively these municipalities are only responsible for 4% of total spending. In contrast, municipalities with populations of 100 000 to 500 000, though fewer in number (only four municipalities exceed 100 000 inhabitants) have considerably lower per capita expenditures (EUR 1 490). This indicates that they may benefit from more efficient service delivery and cost advantages linked to larger populations and less dispersion. However, the largest municipalities (100 001 – 500 000) represent the greatest share of total regional expenditure (approximately 30.4%), emphasising their dominant role in the overall fiscal landscape.
Per capita expenditure and share of total expenditure by size of municipality, 2023
Source: OECD MUNIFI database based on data from (Ministry of Finance Spain, n.d.[11])
Local government revenue is heavily reliant on intergovernmental transfers
In 2023, local government entities in Castilla y León mobilised approximately EUR 3.83 billion in revenue, equivalent to nearly 38% of total regional revenue (EUR 10.1 billion) (Figure 4.12). Local income is predominantly composed of current transfers from other levels of government, which amounted to EUR 1.5 billion, or 39% of total revenue. Own-source revenues, such as direct taxes (EUR 1.05 billion) and fees and charges (EUR 592 million), make up a comparatively smaller share. While regional governments in Spain also rely heavily on intergovernmental transfers (over 70% of their revenues when shared taxes are included), local government dependence is even more pronounced. This is particularly true when recognising that, under OECD classifications, a portion of local tax revenues, such as shared taxes, are counted as grants.
Breakdown of total local government revenue by source in Castilla y León, 2023 (EUR million)
Smaller municipalities exhibit greater fiscal vulnerability than larger ones, driven by heavy dependence on grants and subsidies (Figure 4.13). Per capita revenue from grants and subsidies is significantly higher in smaller municipalities, particularly those with fewer than 100 inhabitants (EUR 1 424 per capita), compared to larger municipalities with populations between 100 001 and 500 000 (EUR 466 per capita). As municipality size grows, reliance on these transfers declines, while revenue from direct sources, notably tax revenue, becomes increasingly significant. Larger municipalities (≥100 001 inhabitants) benefit from more diversified revenue streams and achieve higher per capita tax revenues (EUR 507) than smaller municipalities (EUR 375). This shift reflects economies of scale, greater fiscal autonomy, and a broader local tax base. The considerable dependence of small municipalities on external funding sources, particularly grants and subsidies, raises ongoing concerns about their long-term fiscal sustainability and capacity to independently finance essential infrastructure and services.
Per capita municipal revenue by category and municipality size, 2023
Demographic change is reshaping investment priorities for public investment in Castilla y León. Shrinking municipalities and increasing demand for health and long-term care services will shift infrastructure needs and service requirements. At the same time, ensuring adequate transport connectivity, expanding digital infrastructure, and improving the built environment are critical for sustaining regional attractiveness, economic activity and service accessibility in sparsely populated areas. Without targeted adjustments, public investment risks becoming misaligned with evolving demographic realities, potentially leading to an inefficient use of resources that reinforce existing disparities between urban and rural areas and further driving talent loss in the region.
Despite their central role in public investment, regional and local governments in Castilla y León face constraints that limit their ability to proactively respond to demographic change. A significant share of investment funding depends on capital transfers from national and European sources, which can create uncertainty in long-term planning. In 2022, combined local and regional public investment in Castilla y León amounted to approximately EUR 1.7 billion, or about 2.5% of the region’s GDP. This level of investment appears relatively substantial when set against the 2022 share of total public investment in Spain, which stood at 8.8% of GDP. Nonetheless, the scale and persistence of demographic pressures raise questions about whether existing funding mechanisms and governance structures are sufficiently robust to support sustained, long-term adaptation.
This section examines how public investment in Castilla y León will need to adapt to demographic trends. It provides an overview of regional and municipal investment patterns, the main funding sources for public investment, and the role of European funds such as the European Regional Development Fund (ERDF), the European Social Fund Plus (ESF+), the European Agricultural Fund for Rural Development (EAFRD), and the Recovery and Resilience Facility (RRF) and national funds in addressing demographic challenges. Additionally, it critically assesses potential misalignments between investment priorities and demographic realities, exploring how strategic adjustments could enhance economic resilience, maintain service provision, and promote long-term territorial cohesion.
Public investment by subnational governments remains high in relative terms
Subnational governments in Spain play a major role in public investment but allocate a comparatively low share of their budgets to it (Figure 4.14). Spain’s relatively high share of subnational public investment in total public investment (65.1%) highlights the importance of regional governments in driving investment decisions. Spain's subnational public investment as a share of total public investment is slightly below the OECD average for (quasi-) federal countries (67.2%), but above the OECD average (57.7%). However, the low share of subnational public investment within subnational expenditure (7.7%) reveals constraints in fiscal capacity that may hinder the ability of subnational governments to address long-term challenges, such as demographic change (Figure 4.14).
Subnational public investment as a share of total public investment and as a share of subnational expenditure, 2022
Note: Public investment is defined as gross capital formation and acquisitions, less disposals of non-financial non-produced assets.
Source: OECD Subnational governments structure and finance database.
Public investment in Castilla y León has followed a cyclical trend over the past decade, driven by broader economic conditions, fiscal consolidation measures, and stimulus-driven recovery efforts (Figure 4.15). Between 2012 and 2016, investment at local and regional levels declined in real terms, reflecting post-crisis austerity and constrained public budgets. Local public investment dropped from approximately EUR 503 million in 2012 to EUR 444 million in 2016, while regional investment declined from EUR 962 million to EUR 692 million over the same period. Public investment recovered steadily from 2017 onward, bolstered particularly by the influx of funds associated with Spain’s Recovery and Resilience Plan (RRP) under NextGenerationEU. By 2023, local investment had risen to EUR 690 million (a 55% increase from its low point in 2016), while regional investment surged to EUR 1.2 billion, a 78% increase from the low point in 2016 (and nearly 78% above the lowest point in 2014). These figures represent approximately 1.06% and 1.84% of Castilla y León’s regional GDP, respectively, highlighting a strong combined commitment to public investment relative to the region’s economic output. In Castilla y León, regional and local governments have distinct investment roles: the regional government oversees larger infrastructure projects, such as healthcare facilities, schools, and transportation networks, while local governments focus on community-level investments, including local roads, cultural centres, and smaller utilities (Junta de Castilla y León, 2007[12]).
Local and regional public investment in Castilla y León (2012–2023 in constant prices and million Eur)
Note: 2015 base year.
Regional public investment in Castilla y León between 2012 and 2023 was consistently concentrated in economic affairs and health (Figure 4.16). Investment in economic affairs – which includes transport infrastructure – remained the largest functional category throughout the period. Sustaining regional connectivity and mobility has been a key priority, particularly in rural areas affected by population decline. Health ranked as the second-largest investment area, generally accounting for 14-20% of regional public investment annually, pointing to growing demands linked to population ageing and the need to strengthen healthcare delivery. In contrast, investment in education remained relatively stable but modest (10-15%), while social protection consistently received less than 2% of total regional investment.
Regional public investment by government function as a % of all regional public investment, 2012-23
Source: OECD REGOFI Database based on data from Ministry of Finance, Spain.
The regional government of Castilla y León is increasingly aware of the growing pressure to invest in healthcare and the potential trade-offs this could create. While economic affairs – particularly transport – remain the top investment priority, the steady share devoted to health signals a strategic effort to prepare for ageing. The region knows it will need to strengthen healthcare provision in rural areas while continuing to invest in transport and digital infrastructure, which are essential not only for service access, but also for retaining young people and attracting talent to counteract population decline.
Municipal investment priorities in Castilla y León reflect decentralised competences and diverging infrastructure needs across municipality sizes
In 2023, municipalities in Castilla y León invested a total of approximately EUR 690 million. The largest share, just under 35%, was allocated to basic public services such as waste collection, lighting, and urban infrastructure (Ministry of Finance Spain, n.d.[11]). This was followed by economic actions (22.4%) and general government functions (12.2%). Investment in social sectors remained low: education accounted for 1.7% of total investment, and health for just 0.4%, reflecting the fact that these responsibilities largely fall under the remit of the regional government of Castilla y León. This distribution of municipal investment reflects both local development priorities and Spain’s broader decentralised governance framework, in which regions manage core welfare functions while municipalities focus on local infrastructure and service delivery.
Expenditure on public investment varies significantly across municipality sizes. Smaller municipalities (≤ 5 000 inhabitants) report the highest per capita investment (Figure 4.17). These municipalities also rely more heavily on intergovernmental transfers to finance capital expenditure. In contrast, mid-sized municipalities (20 001–50 000 inhabitants) exhibit the lowest per capita investment, potentially indicating a funding gap that could limit growth and service delivery. Larger municipalities (≥ 100 001 inhabitants) benefit from economies of scale, achieving moderate per capita investment.
Investment priorities also diverge across municipal sizes. Small municipalities allocate the majority of their investment to foundational infrastructure (39.2%) and replacement infrastructure (28.9%), highlighting their focus on maintaining essential assets and basic service provision. Mid-sized municipalities concentrate investment in replacement infrastructure (53.0%), suggesting a need to maintain ageing assets but limited capacity for expansion. In contrast, large municipalities show a more balanced investment profile, dedicating around one-third each to replacement (30.6%) and new operational infrastructure (28.7%), potentially in line with their role as regional service centres.
Per capita public investment in Castilla y León by investment type and municipal population size (2023)
Public investment in Castilla y León is funded through national and EU transfers
Public investment in Castilla y León is predominantly financed through capital transfers from the national government and the European Union (EU), but the sources and delivery mechanisms differ between regional and municipal levels. For the regional government, the Fund for the Guarantee of Fundamental Public Services is the single largest source of capital transfers, contributing 29% to 36% of total capital investment funding between 2020 and 2024. This fund aims to equalise resources across regions and supports essential services such as healthcare and education. EU funds are the second-largest source of capital financing at the regional level, accounting for 23% to 32%, with the European Regional Development Fund (ERDF) playing a key role – particularly in infrastructure and economic revitalisation. In contrast, the European Social Fund (ESF) provides more modest capital contributions (10–13%) (Ministry of Finance Spain, n.d.[4]), but lays a strategic role in supporting actions related to employment, social inclusion, and education, which are critical for enhancing human capital and mitigating the impacts of demographic change
At the municipal level, investment is primarily financed through capital grants from the regional government, particularly for small municipalities under 5 000 inhabitants. Additional sources include specific national programmes and EU co-financed projects, though these are generally channelled through the region’s EU programmes rather than allocated directly. As such, municipalities rely heavily on regional-level mediation to access EU investment funding. Overall, EU funds contribute to around a quarter of total public investment in Castilla y León, underscoring their strategic role in supporting territorial cohesion and addressing demographic challenges.
Harnessing EU and national investment to implement demographic adaptation in Castilla y León
Castilla y León has mobilised a range of investment programs to adapt to the challenges posed by demographic change, leveraging both regional and European funding sources. Key EU programs managed at regional level include the European Regional Development Fund (ERDF), the European Social Fund (ESF+), the European Agricultural Fund for Rural Development (EAFRD) and the Common Agricultural Policy (CAP). These funds provide current and capital transfers, which support rural livelihoods, enhance infrastructure, and promote socio-economic resilience. Despite this substantial financial effort, there remains significant untapped potential to better align Cohesion Policy instruments with the region’s demographic objectives. The mid-term review of the 2021-27 programmes offers a key window to address this gap, by reprioritising investments towards inter-municipal governance, rural housing, service consolidation, and strategic workforce development (Box 4.1).
In April 2025, the European Commission presented its mid-term review of the 2021–2027 EU Cohesion Policy, proposing amendments to key regulations governing the European Regional Development Fund (ERDF), the Cohesion Fund, and the Just Transition Fund. This review responds to Europe’s shifting geopolitical, ecological and technological landscape and aims to better align regional investments with emerging strategic priorities. The review introduces new priority areas eligible for reallocation of existing cohesion funds:
Decarbonisation and the energy transition
Defense capabilities and military mobility
Affordable housing
Water resilience and infrastructure modernisation
Strategic technologies under the STEP platform
To support this reorientation, the proposal offers increased co-financing (up to 100%), advance pre-financing (up to 30%), a one-year extension of eligibility, and simplified implementation rules, giving regions greater flexibility to respond to evolving needs. The review also reflects the priorities outlined in the Draghi report on the Future of European Competitiveness, including closing the innovation gap, diversifying supply chains, and investing in climate resilience and key technologies.
For regions like Castilla y León, the mid-term review presents a critical opportunity to realign EU-funded programmes with long-term demographic priorities, either in the current funding period or for the post-2027 period, for which the mid-term review sets an important strategic decision. The mid-term review highlights key areas, such as rural housing, skills development, and infrastructure in depopulating areas, that could guide future programming.
Source: (European Commission, 2025[13])
While regional authorities in Castilla y León have already locked in their investment planning for the 2021-2027 period and do not intend to revise their EU programmes in light of the mid-term review, they are using this process strategically to prepare for the post-2027 programming period. This forward-looking approach offers an opportunity to better integrate demographic priorities – such as rural housing, inter-municipal service delivery, and skills development – into the design of future investment strategies.
Additionally, Spain’s Recovery and Resilience Plan (RRP, developed under the EU’s Recovery and Resilience Facility (RRF), plays a critical role in supporting long-term adaptation to demographic shifts. The RRF provides significant investment in digitalisation, healthcare modernisation, rural connectivity and economic diversification, all of which directly contribute to Castilla y León’s efforts to improve service accessibility and enhance regional resilience.
In 2021, Castilla y León was allocated over EUR 742 million in RRF funding, distributed across a wide range of sectoral components linked to the demographic challenge. These included funding for the renovation of public and residential buildings, clean energy projects in small municipalities, digital transformation, sustainable tourism, water supply in rural areas, and active labour market policies. Notably, EUR 16 million was earmarked for clean energy in municipalities affected by depopulation, and EUR 11 million for energy rehabilitation in municipalities with fewer than 5 000 inhabitants. However, while programming is largely complete at the national level and funds have been allocated to regions via sectoral agreements, Castilla y León's execution role remains constrained. The region is primarily responsible for managing pre-assigned projects rather than designing or directing RRF spending. This governance structure limits its ability to fully tailor investments to demographic priorities, despite their alignment in many components. Moreover, time-bound spending constraints pose a risk to full implementation. The RRF operates under a strict timeline, with most expenditures required to be completed by 2026. The likelihood of successful project finalisation within this timeframe may be affected by administrative bottlenecks, procurement delays, or local capacity constraints, especially in infrastructure-heavy components (European Commission, 2024[14]).
While the primary focus of the ERDF, ES+F, and EAFRD programmes in Castilla y León is on mitigating the impacts of demographic change, they also incorporate elements of adaptation (Table 4.1). The region’s investment priorities centre around infrastructure development, enhancing economic competitiveness, and improving service accessibility, particularly in rural and sparsely populated areas. Although some specific adaptation measures – such as climate resilience, digitalisation, and rural diversification – are included, the overall emphasis remains on addressing the immediate challenges of depopulation and ageing. This approach prioritises short-term mitigation efforts to retain populations, stimulate economic growth, and improve living standards, rather than implementing broader structural changes to address the long-term demographic shifts. The RRF, in contrast, has a stronger emphasis on structural adaptation, aiming to future-proof the region’s economy through digital transformation, sustainability, and territorial cohesion policies.
Beyond addressing demographic challenges through broad infrastructure and service provision, Castilla y León’s ERDF programme also includes specific actions to promote economic diversification and competitiveness. These investments can be further leveraged to support long-term demographic adaptation in the region.
The 2021–27 ERDF programme for Castilla y León allocates over EUR 562 million to regional development, with EUR 355 million in EU co-financing. A significant share is directed toward economic diversification and competitiveness, key levers for addressing demographic decline. Under Specific Objective 1.1, more than EUR 50 million supports the reinforcement of research and innovation capacities through strategic R&D projects, innovation ecosystems, and technology-based firms. Additionally, EUR 36 million under Specific Objective 1.3 aims to foster SME development and internationalisation, targeting mature firms with growth potential, particularly in smart specialisation sectors.
Despite these efforts, Castilla y León could further strengthen the demographic relevance of these investments by sharpening their spatial focus and aligning them more closely with local strategies in depopulating areas. For instance, ERDF-financed innovation hubs, entrepreneurship support schemes, and digitalisation efforts could be more systematically linked to rural revitalisation and inter-municipal service collaboration. Moreover, funding earmarked under STEP (EUR 43 million) offers new opportunities to embed Castilla y León in emerging technology value chains, provided that mechanisms are in place to ensure inclusion of rural and peripheral territories. Additionally, prioritising projects that integrate innovation with territorial cohesion, such as rural entrepreneurship platforms, teleworking centres, or sector-specific applied research can help maximise ERDF’s contribution to sustainable demographic adaptation.
Regional investment capacity
Castilla y León demonstrates a robust ability to allocate planned funds but faces obstacles in spending efficiency (Figure 4.18). Absorption capacity, measured by the proportion of planned funds decided and spent, is a critical indicator of the efficiency and effectiveness of regional fund utilisation. Castilla y León demonstrates strong planning and allocation capabilities with decided percentages exceeding 122% across all programs (EAFRD, ERDF, ESF). However, its spending efficiency lags behind, with spent percentages ranging from 70.99% (ERDF) to 71.87% (ESF), consistently below the averages of other regions in key programs such as EAFRD (76.17% vs. 71.34%). When comparing Spain's overall performance with the rest of the EU, its spent percentage stands at 69% with a decided percentage of 125%, making it the second-lowest after Ireland with 65% (European Commission, 2025[15]). This gap between decided and spent funds suggests challenges in project execution, particularly for infrastructure-intensive programs, which may face administrative or logistical bottlenecks (OECD, 2020[18]).
Note: Chart covers data up to 31/12/2023, programming period 2014-20.
Source: (European Commission, 2025[15])
Demographic change in Castilla y León has placed growing pressure on the region’s multi-level governance system. While the region has not undergone major reforms of its governance framework in recent years, incremental reforms, policy developments, and co-operation mechanisms have emerged in response to demographic shifts. This section reviews how existing governance arrangements and policy instruments in Castilla y León are responding to demographic pressures, including the region’s objective of retaining and attracting talent, and where institutional or operational improvements may still be needed to support service delivery and local development in shrinking areas.
The multi-level governance framework for addressing demographic change in Castilla y León is well-developed, but complex
Demographic change in Castilla y León has triggered a wide array of policy responses at national, regional, and local levels. While implementation remains uneven, the region has taken more extensive and sustained action than many others in Spain and Europe. Still, the governance framework underpinning these efforts is complex and often fragmented. Responsibilities for managing demographic trends are spread across multiple levels of government, often with limited co-ordination or clear division of roles. (Figure 4.19). This can hinder the coherent and effective delivery of policies aimed at reversing or mitigating population decline and talent loss, particularly in rural areas. At the same time, Castilla y León stands out for the breadth of policies and strategies it has developed to address demographic pressures, far more than many other regions facing similar challenges.
Source: OECD elaboration based on national, regional, and local policy documents.
Spain’s national approach to demographic change is anchored in the National Strategy to Address the Demographic Challenge, adopted in March 2019. This strategy represents an important milestone, as it acknowledges the pressing issues of ageing, low birth rates, and rural depopulation. However, it does not provide a clear operational definition of what constitutes a "demographic challenge", nor does it sufficiently account for the diversity of territorial realities across Spain (Consejo de Cuentas de Castilla y León, 2020[19]). In this sense, while the national strategy marks progress compared to the absence of a co-ordinated framework in many other countries, it is recognised by the national government that the strategy requires further development, with plans underway to revise and spatially tailor its approach to better reflect the diverse demographic realities across Spanish regions (OECD, 2024[20]).
At the regional level, Castilla y León has been more proactive than other Spanish and European regions in addressing demographic decline. In 2010, it adopted the Agenda for the Population 2010–2020, aiming to improve demographic trends through youth support, family policies, immigration integration, and incentives for newcomers from other regions (Consejo Económico y Social de Castilla y León, 2023[7]). However, the Agenda did not meet its core objectives. By 2020, the region ranked 313th out of 332 European regions in net population growth, far from its goal of entering the top 100 (Europa Press, 2021[21]) In response, the regional government initiated a new Strategy for Demographic and Territorial Sustainability, developed through a participatory process involving four universities, local governments, civil society, and economic actors (Junta de Castilla y León, 2021[22]). The strategy aims to go beyond past efforts, focusing on rural depopulation, governance reform, rural service delivery, entrepreneurship, and urban-rural linkages (Junta de Castilla y León., n.d.[23]). This more integrated and territorial approach signals a shift in how the region conceptualises the demographic challenge. However, as of 2025, the strategy has not yet been officially adopted and lacks concrete implementation tools, an action plan, or a funding timeline, which undermines its potential impact.
Additionally, Castilla y León has implemented a series of sectoral policies to tackle demographic challenges, particularly in response to rural depopulation, ageing and economic stagnation. Policies aimed at rural connectivity include programs dedicated to on-demand transport and expanding broadband internet access in remote areas (see Chapter 5). Another key policy is the Regional Health Plan (Plan Regional de Salud), which operates within the broader budget of the region's healthcare system and focuses on improving healthcare access and services for elderly populations in rural areas. The regional government has also developed housing support schemes to make rural areas more attractive for families and young people. Additionally, family support policies, along with entrepreneurship and economic development initiatives, seek to address demographic challenges in rural communities (see Chapter 2 for an overview of these). In parallel, a dedicated rural fiscal and grant policy provides tax incentives and subsidies to encourage settlement, job creation, and business activity in small municipalities (Box 1.1) although its overall impact remains to be evaluated (OECD, 2024[20]).
Castilla y León has implemented a targeted rural fiscal and grant policy to mitigate the effects of demographic decline and support revitalisation in low-density areas. The region defines “rural” as municipalities with fewer than 30 000 inhabitants and a population density below 100 inhabitants/km², encompassing 36% of its population (Más Castilla y León, 2022[24]).
The rural fiscal policy offers tax incentives aimed at increasing birth rates, attracting young residents, promoting entrepreneurship, and supporting the continuity of agricultural activities. These include higher tax deductions for families living in rural areas for the birth or adoption of children; tax benefits for individuals under 36 years old – such as deductions for renting, buying, or renovating a home, and zero tax rates on property transfer for first-time rural homebuyers; tax reductions on the acquisition of properties intended for business use; and fiscal relief for agricultural operations, including tax reductions on purchases and the elimination of inheritance taxes on rural estates
In parallel, the region provides a broad range of grants to individuals, businesses, and municipalities – particularly those under 20 000 inhabitants. Employment-related grants represent the largest share, followed by support for economic diversification and agriculture (Figure 4.20). While the region’s demographic strategy references these subsidies, it does not provide data on the financial amounts allocated or evidence of their effectiveness in reversing demographic decline.
Number of grant lines by subject area in Castilla y León (2021)
While demographic change in the region may have been worse without these policies, no systematic evaluation has been carried out to assess their effectiveness. This makes it difficult to definitively prove the success or failure of these measures. While there are expectations in the region that these policies work, the regional government does not have concrete evidence or data to support the impact of these interventions.
Source: (OECD, 2024[20])
At the local level, several provincial and city councils in Castilla y León have overall strategic plans or action framings relating to demographic change. For example, the provincial councils of Palencia and Burgos have broader overall strategic plans, but which contain a strategic focus or specific objectives for the demographic challenge (Consejo de Cuentas de Castilla y León, 2020[19])
Municipal fragmentation and ageing accelerate talent loss and challenge efficient service delivery in Castilla y León
Castilla y León, the largest Autonomous Community in Spain, covers 94 224 km² and is home to a population of just 2.38 million residents. Despite its vast geographical size, the region remains sparsely populated, accounting for only 5% of the national population while representing 18.6% of Spain's territory (INE 2024). In this context, achieving the right scale for public service provision is crucial. Demographic change, including population decline and the shrinking of municipalities, necessitates a continuous reassessment of the scale at which services are delivered. Smaller municipalities in particular face unique challenges that require adapting governance and public service frameworks to ensure that services are both efficient and equitable. Balancing the need for appropriate service scales with the preservation of community vitality and sustainability is vital, as decisions made about scaling services can directly impact the long-term viability of these communities. Thus, maintaining a balance between operational efficiency and the social sustainability of local communities becomes increasingly important in Castilla y León in the face of demographic shifts. This sub-section outlines some of the key challenges Castilla y León faces in managing these pressures.
Fragmentation and rurality define the regional landscape in Castilla y León
Castilla y León comprises 9 provinces, 2 248 municipalities, and 6 175 singular entities, making it the region with the highest number of municipalities in Spain (Figure 4.21). This is nearly 50 times the number of municipalities found in the least fragmented Autonomous Community, Murcia. Municipalities in Castilla y León are, on average, smaller in population than those across the rest of Spain. In Castilla y León, 97% of the municipalities have fewer than 5 000 inhabitants and 90% have fewer than 1 000. Over 700 municipalities in the region, accounting for 32.07% of all municipalities, have populations of fewer than 100 residents, a figure significantly higher than the national average of 16.90%. In contrast, only 2.67% of municipalities have populations over 5 000. Among these, just 13 municipalities, including provincial capitals such as Ávila and Segovia, as well as Burgos, Ponferrada, and Béjar, have populations between 10 000 and 50 000. Medium-sized cities, with populations between 50 000 and 100 000, are even rarer, represented by only three provincial capitals: Palencia, Ávila, and Zamora. The region’s largest cities, those with populations exceeding 100 000, are limited to four: Valladolid, León, Burgo and Salamanca, with Valladolid being the largest, home to nearly 300 000 inhabitants.
Municipal structure in Spain: distribution and population composition by Autonomous Community (2022)
Source: (INE Spain, n.d.[25])
Between 2002 and 2022, the number of very small municipalities increased significantly (Figure 4.22). The share of municipalities with fewer than 100 inhabitants increased from 21.10% to 32.07%. In contrast, the proportion of municipalities with populations between 101 and 1 000 inhabitants has decreased from 66.50% to 57.38%. Municipalities with populations between 1 001 and 5 000, fell from 10.20% to 7.87%. Municipalities with populations over 5 000, saw a modest increase from 2.14% to 2.67%. The growing number of very small municipalities signals an ongoing challenge of rural depopulation, with significant implications for public service provision and regional development.
Share of municipalities by size in Castilla y León, 2002 and 2022
The rising share of very small municipalities in Castilla y León reflects a broader trend of rural outmigration, particularly among younger populations seeking better education, employment, and services. This population decline reduces the local labour force and tax base while accelerating ageing, placing growing pressure on the provision of essential services such as healthcare, education, and transport. Low population density further increases the per capita cost of infrastructure and service delivery. With only 2.67% of municipalities exceeding 5 000 inhabitants, the region lacks sufficient urban centres to act as economic and service anchors for surrounding rural areas. This imbalance hampers regional development and threatens the long-term sustainability of many municipalities. Addressing these challenges will require strengthened inter-municipal co-operation and, where appropriate, territorial reorganisation to improve service efficiency while supporting community resilience.
Inter-municipal co-operation is essential for service delivery, but lacks strategic focus
Municipal co-operation is widespread in Castilla y León. The region has the highest number of mancomunidades in Spain (Box 4.4), far exceeding all other regions (Figure 4.23). This reflects the strong reliance on municipal co-operation in rural and sparsely populated areas, where local governments face administrative and financial constraints in delivering services independently. More than 90% of municipalities in seven out of the nine provinces participate in at least one co-operation agreements. This widespread participation underscores the importance of IMC in helping small, fragmented municipalities maintain essential public services and work together to address shared challenges.
Number of mancomunidades per AC and municipal participation by province in Castilla y León (2022)
Mancomunidades are voluntary inter-municipal co-operation (IMC) entities that allow municipalities to pool resources and collaborate on service provision, infrastructure, and regional development. They are particularly relevant in Spain, where a high degree of municipal fragmentation – especially in rural areas – poses challenges for service efficiency and fiscal sustainability. Mancomunidades are highly flexible in their structure and functioning:
Constitutive flexibility – Their creation process is relatively simple, requiring only an agreement among participating municipalities.
Territorial flexibility – Municipalities forming a mancomunidad do not need to be geographically contiguous (although they often are in practice).
Functional flexibility – Mancomunidades can be established for a wide range of purposes, including waste management, infrastructure development, environmental protection, social service provision, urban planning, and economic development. Municipalities can modify or limit their scope over time based on evolving needs.
The Spanish Local Government Act (Regulatory Law on the Bases of the Local Regime (LRBRL), 1985) provides the legal foundation for their establishment. Additionally, regional statutes may set specific requirements for their operation, including financial oversight and reporting obligations.
Challenges of mancomunidades in Castilla y León
While mancomunidades enhance economies of scale and improve service delivery, they face challenges related to:
Financial sustainability: Many rely on regional and municipal funding, which can be inconsistent.
Co-ordination and governance: Differences in political priorities and administrative capacity among municipalities can hinder long-term planning.
Limited strategic focus: While they excel in operational service delivery, many lack the mandate or resources to drive broader economic and regional development strategies.
Municipal co-operation in mancomunidades has a strong focus on essential municipal functions but is not necessarily of strategic nature. The most commonly shared service is solid waste management (nearly 70%), followed by water supply (around 50%) (Figure 4.24). Culture and sports, and tourism also feature prominently as well as infrastructure-related services, such as road maintenance, street cleaning and urban planning. This suggests that municipalities often join forces to maintain public spaces and transport networks. However, there is a noticeable lack of strategic initiatives focused on economic and regional development. Services related to economic promotion, innovation and long-term growth strategies appear underrepresented, indicating that municipal co-operation is primarily centred on immediate service delivery rather than proactively shaping regional economic and demographic resilience.
There are also obstacles to co-operation beyond provincial lines with a strong preference for localised co-operation. The vast majority of mancomunidades operate within a single province, making provincial-level co-operation the dominant form of inter-municipal governance. Of the 235 recorded cases, 220 (over 93%) operate within a single province, reinforcing the reliance on municipal co-operation at the provincial level. Among the provinces, Palencia (37), Segovia (31), and Burgos (28) have the highest number of provincial mancomunidades. Inter-provincial mancomunidades, which span across multiple provinces, are significantly fewer with only 14 cases. This highlights the administrative and political challenges of co-ordinating services across provincial boundaries. The inter-regional category is almost non-existent with only one recorded case, suggesting that municipal co-operation in Castilla y León remains largely confined to intra-regional arrangements.
Castilla y León faces challenges in using inter-municipal co-operation more strategically to address demographic change and rural depopulation. While mancomunidades play a crucial role in municipal service provision, their effectiveness and scalability are often constrained by administrative fragmentation. The dominance of provincial-level co-operation suggests a need to strengthen inter-provincial and inter‑regional co-ordination, particularly for addressing cross-border infrastructure and service challenges in sparsely populated areas. Moreover, differences in size and interests between municipalities can impede co-operation. To effectively address the demographic and geographic disparities in the region, stronger models of IMC are needed. A key obstacle to more strategic co-operation through IMC in the region is the incomplete regulatory framework for Law 7/2013 on Planning, Services, and Government of the Territory of Castilla y León (LORSERGO), which established the Basic Units for Territorial Planning and Services (UBOST) to facilitate rural Mancomunidades of General Interest (MIGs) (see Chapter 3). Delays in implementation of the law have limited the region’s ability to establish rural MIGs. Once fully implemented, UBOST will enable municipalities to work together more strategically, improving co-ordination and planning for demographic change and regional development.
1. Strengthen fiscal resilience to demographic change
The main policy challenge arising from demographic change for regional government finances in Castilla y León is the growing fiscal pressure from an ageing and shrinking population, which is increasing healthcare costs while constraining tax revenues. Rising health expenditure may limits investment in other critical areas like infrastructure and economic diversification, essential for reversing population decline. At the same time, reliance on intergovernmental transfers and shared taxes over which the region has limited control heightens fiscal vulnerability. A comprehensive fiscal strategy to adapt to demographic realities in Castilla y León should focus on managing expenditure efficiently, diversifying revenue sources, and reforming the fiscal equalization system while strengthening the financial resilience of the health and long-term care sector. To achieve this, key reforms should include:
Enhancing own-source revenue to reduce fiscal vulnerability: Castilla y León could strengthen its fiscal autonomy by expanding the role of local taxation and advocating for greater flexibility in shared tax arrangements. This could involve optimising and diversifying local tax instruments, such as second-home property taxes in high-demand areas. Regional and municipal governments could also look into improving property tax efficiency through updated cadastral values and digitalisation of records. Investing in digital infrastructure for tax administration and providing staff training helps build local capacity for tax modelling, auditing, and enforcement. Municipalities in Castilla y León may also consider reviewing and adjusting user charges and fees (e.g. for water, waste, parking, or recreation services), particularly in areas with high seasonal population fluctuations. In addition, integrating demographic forecasts into tax modelling can help anticipate demographic and economic shifts.
Advocate for reform of the fiscal equalisation schemes to reflect the rising costs of delivering public services in ageing and sparsely populated areas. Castilla y León could advocate for a review of the current equalisation scheme to adjusting funding formulas to account for the higher per capita costs associated with healthcare and social protection in ACs with a high old-age dependency ratio. Finland’s experience (Box 4.5) demonstrates the importance of demographic-sensitive equalization.
At the same time, while outside the scope of this analysis, fiscal reform needs to be balanced with additional structural adjustments. While fiscal measures – such as tax reforms, health system efficiency improvements, and fiscal equalisation adjustments – will help alleviate some pressures, they will not be sufficient on their own. Boosting productivity, increasing labour force participation, attracting skilled migrants, and supporting higher fertility rates are also critical to ensuring long-term economic and fiscal sustainability in Castilla y León. These efforts require co-ordinated action across all levels of government and should be complemented by policies that enhance regional economic competitiveness, improve infrastructure, and foster innovation.
Policy objectives
Finland has long faced challenges related to an aging and declining population, particularly in rural municipalities with high service delivery costs. In response, Finland adjusted its fiscal equalisation system already back in 1993 to ensure that municipalities with ageing populations and greater healthcare and social service needs receive adequate funding. The Finnish model explicitly integrates demographic criteria into the equalisation system, helping to mitigate fiscal stress for municipalities experiencing population loss and rising dependency ratios.
Policy implementation
The Finnish fiscal equalisation system distributes resources among municipalities based on both revenue-raising capacity and expenditure needs, with age-based demographic factors playing a key role in determining allocations:
Age-based weighting: municipalities with a higher share of elderly residents receive additional funding, reflecting the higher healthcare and long-term care costs associated with ageing populations.
Compensating for demographic imbalances: while population density is not explicitly a factor in the allocation of tax and grant funding, municipalities with higher service provision costs due to demographic shifts receive additional support, particularly in healthcare-related expenditures.
This approach ensures that municipalities with high dependency ratios do not face excessive fiscal stress as their population structure changes.
2. Maintain public investments aligned with demographic change
Castilla y León’s public investment is struggling to keep pace with demographic realities. Rising demand for healthcare and long-term care adds pressure, particularly in rural areas, while ensuring transport connectivity, digital infrastructure, and a resilient built environment is essential for economic activity and service accessibility. However, fiscal constraints limit the ability of local and regional governments to invest in critical areas such as healthcare, transport, and digital infrastructure. In addition, heavy reliance on national and EU transfers creates planning uncertainty. Key avenues to overcome these challenges include:
Develop a long-term public investment strategy at the regional level: While Castilla y León has made progress in sector-specific investment planning, including in healthcare infrastructure, rural development, and the digital and ecological transition, these efforts are not yet embedded within a unified, forward-looking investment strategy that accounts for demographic change. Developing a long-term public investment framework that explicitly integrates population ageing, rural depopulation, and territorial disparities would enable more efficient and future-oriented resource allocation. This approach should forecast service and infrastructure needs across territories and prioritise investments that strengthen economic resilience and accessibility. Key sectors include healthcare, transport, digital infrastructure, and emerging industries such as renewable energy and sustainable agriculture.
Improve public investment planning and delivery at the local level: To ensure that allocated funds translate into effective public investment, Castilla y León could strengthen implementation capacity at both the regional and municipal levels. While the region benefits from substantial EU and national transfers, absorption rates remain uneven, particularly in smaller municipalities with limited administrative and technical resources. Addressing this may mean streamlining procurement and approval procedures, expanding the use of digital tools for project monitoring, and offering tailored technical assistance to local governments, especially for complex or multi-year infrastructure projects. Establishing regional support hubs or shared service platforms could also help municipalities with limited staffing navigate regulatory and financial requirements. Improving co-ordination between regional and local levels will be essential to overcome delivery bottlenecks and maximise the impact of public investment in the context of demographic and territorial disparities.
Align public services and infrastructure with demographic realities and talent retention goals: Castilla y León could adapt public services and infrastructure to reflect demographic shifts and support talent retention. In shrinking and ageing areas, investments should prioritise age-friendly infrastructure and the repurposing of underused facilities into multi-functional or care-oriented spaces. In growing urban centres, expanding education, mobility, and housing infrastructure can help attract and retain young people and families. Strategic planning tools and demographic data should guide these decisions to reduce inefficiencies and ensure long-term service sustainability.
Link investment funding to co-operation, capacity-building, and demographic adaptation: To increase the impact of public investment and counteract territorial inequalities and talent loss, Castilla y León may benefit from conditioning regional funding on intermunicipal co-operation – particularly in fragmented areas. Capacity-building support and performance-based funding can help local governments align investments with demographic adaptation goals, including improving local conditions, as shown in good practices from different EU countries in Central Europe (Box 4.6).
Policy objectives
The ADAPT2DC (Adaptation to Demographic Change) project aimed to develop cost-effective solutions for delivering public services and managing infrastructure in regions facing population decline and ageing. The initiative sought to:
Reduce the financial burden of maintaining underused infrastructure in shrinking areas.
Improve service efficiency by restructuring public services to better match demographic realities.
Enhance regional co-operation to ensure sustainable service delivery.
Introduce digital and innovative solutions to address challenges in healthcare, transport, and governance.
Policy implementation
The project, implemented across Germany, Poland, Czechia, Hungary, Italy, and Slovenia, tested innovative approaches through pilot actions:
Poland: Introduced telemedicine units to monitor elderly patients remotely, improving access to healthcare while reducing costs.
Germany: Developed demographic coaching programs for local governments to improve planning and resource allocation.
Czechia: Implemented shared service models between municipalities to optimise costs for public infrastructure.
Hungary: Piloted new financing models to help local governments manage shrinking tax bases.
3. Strengthen the policy framework for demographic change in Castilla y León
Castilla y León is among the more advanced regions in Spain in responding to demographic challenges, with regional, provincial, and municipal administrations implementing a broad range of initiatives. This reflects strong political commitment, particularly to supporting rural areas affected by depopulation and ageing. However, many measures would benefit from clearer problem definitions, stronger causal analysis, and better co-ordination across levels of government. Building on its existing progress, the region could strengthen the impact of its demographic strategy through a more integrated, evidence-based approach, supported by demographic impact assessments and a shared system of indicators. Key actions include:
Updating the national population strategy and spatially target it: The Spanish government could revise, in line with its ambitions to do so, the National Strategy to Address the Demographic Challenge from 2019 to reflect evolving trends, particularly rural depopulation and ageing. The current strategy lacks spatial targeting, making it difficult for regions like Castilla y León to implement tailored policies. Updating the strategy with the latest demographic data, localised interventions and flexible funding mechanisms will ensure that national policies effectively support regional challenges.
Formally adopt the developed regional strategy for demographic adaptation: Castilla y León could turn the existing regional framework and analysis for demographic change into a formally adopted government strategy with clear measures, responsibilities, and a dedicated budget. The adopted strategy should include an action plan to improve co-ordination across regional, provincial, and municipal levels. This will prevent fragmented efforts and improve resource allocation.
Integrate demographic impact assessments into policymaking frameworks: To ensure public policies support long-term demographic sustainability, Castilla y León could introduce demographic impact assessments (DIA) as part of its policy evaluation processes. These assessments should be designed to be simple and efficient, and embedded within broader socio-economic impact evaluations to avoid administrative burden. Applying DIA to key sectors such as housing, transport, education, and economic development would help identify how policy choices influence population trends and territorial balance. This would strengthen the region’s ability to align investments and reforms with demographic resilience objectives.
Consider establishing a permanent observatory to support demographic policymaking: To strengthen evidence-based policymaking on demographic change, Castilla y León could consider establishing a permanent demographic observatory. Such a body could support the systematic monitoring of population trends, consolidate demographic research, and provide technical input to inform regional and local decision-making. A regional observatory would help anticipate demographic challenges, assess the long-term impact of public policies, and improve the design of targeted interventions. Box 4.7 highlights the Demographic Observatory of Aragón as a potential model to build policy capacity through consistent monitoring, stronger regional planning, and greater accountability.
Policy objectives
The Demographic Observatory of Aragón was established in May 2018 as part of the region's Special Directive on Demographic Policy and Against Depopulation, approved in October 2017. Its primary objective is to systematically monitor and analyse demographic trends, such as population decline, ageing, and migration patterns, to inform public policies effectively.
Policy implementation
The observatory functions as a permanent data and research hub, supporting policymakers, researchers, and the public in tracking long-term demographic trends and assessing the effectiveness of demographic policies. Its core activities include:
Collecting and analysing demographic data on birth rates, mortality rates, migration flows, and population distribution.
Evaluating the impact of demographic policies, assessing whether government initiatives effectively address population challenges.
Providing policy recommendations, using demographic insights to develop targeted strategies, particularly for rural areas facing population decline.
4. Optimise inter-municipal co-operation in the face of demographic change
Castilla y León faces significant challenges in maintaining the right scale for local public service delivery in the context of ongoing demographic change. The region is home to a large number of small municipalities, with over 30% having fewer than 100 inhabitants, a trend that has been increasing in recent years. This small size often leads to fragmented service delivery, inefficiencies and an inability to provide basic public services in a sustainable manner. With the region’s sparse population spread across a vast geographical area, maintaining high-quality services while also ensuring that they are cost-effective and equitable is becoming more difficult. Additionally, many smaller municipalities are experiencing rapid population decline, further exacerbating the issue. Considering these issues, the following is recommended:
Strengthening inter-municipal co-operation (IMC): Promote a more strategic and institutionalised form of IMC that moves beyond functional co-operation (e.g., on waste or water management) to address demographic change with a long-term vision. This requires ensuring that co-operation structures reflect functional realities rather than administrative boundaries (such as provinces), as is currently the case in most agreements. A critical step in this direction is the full implementation of Law 7/2013 (LORSERGO) to operationalise rural mancomunidades of general interest, creating a more resilient and sustainable governance structure. Box 4.8 provides insights from the French EPCI model, which offers a structured framework for inter-municipal co-operation, balancing financial autonomy, strategic planning, and service efficiency. Castilla y León could strengthen its mancomunidades by integrating elements from this model.
Exploring inter-municipal solutions for very small municipalities: Rather than encouraging structural mergers, Castilla y León could support deeper inter-municipal partnerships as a pragmatic alternative to improve service delivery, reduce fragmentation, and support fiscal sustainability, while preserving local identities. While structural consolidation may remain an option in selected cases, a more immediate focus could be placed on supporting voluntary co-operation through technical assistance programmes that help municipalities formalise co-operation agreements, share administrative services, or pool staff and resources.
Enhancing public sector capacity in rural municipalities: Expand training programs for local officials, building on the School of Mayors initiative by the Association of municipalities. This may include structured, ongoing capacity-building workshops for mayors, councillors, and municipal secretaries on critical topics such as local governance, town planning, budget management, enforcement processes, and public employment stabilisation. Strengthening these skills will enhance local decision-making, improve service delivery, and support municipal leaders in tackling demographic challenges
Strengthening rural-urban governance mechanisms to address talent outmigration and demographic imbalances: Castilla y León could reinforce governance mechanisms that allow rural municipalities and nearby towns, even across provincial boundaries, to work together in attracting and retaining residents. Strengthening inter-municipal co-operation on shared services, mobility, and job creation can help smaller municipalities offer more competitive living conditions. Practical steps could include joint public transport systems, co-ordinated education and healthcare access, and shared economic development initiatives.
Exploring the idea of a rural regulatory sandbox: Establish a flexible regulatory framework tailored to rural realities, allowing for pilot initiatives that test new policies before broader implementation. This could include adjusting social venue closing hours, addressing high costs and service gaps in regulated telecommunications, and revising cable TV fees for small businesses such as rural bars, which serve as vital social hubs. A more adaptable regulatory environment would stimulate rural economic activity, enhance local quality of life, and support demographic retention. Similar approaches have been applied in other sectors, such as Utah’s legal regulatory sandbox, which allows non-traditional legal providers to offer services under a supervised, experimental framework to improve access and foster innovation (Utah Office of Legal Services Innovation, 2024[32]).
Castilla y León could strengthen its mancomunidades by adopting key elements from the Communautés de Communes, the EPCI model designed specifically for rural areas, to create a more institutionalized, financially stable, and development-oriented inter-municipal co-operation system.
Key features of the French model
The French model differs from traditional voluntary IMC models in three fundamental ways:
Mandatory participation: Since 2014, all French municipalities must be part of an intercommunalité, ensuring full territorial coverage and preventing administrative fragmentation.
Strategic competences: EPCIs go beyond basic service provision to include economic development, innovation policies, and regional planning. This allows municipalities to work together on long-term strategies rather than only addressing operational challenges.
Financial autonomy: Unlike mancomunidades, EPCIs have independent taxation powers and receive direct fiscal transfers, allowing for stable funding without reliance on voluntary municipal contributions.
Integrated urban-rural co-operation: Large and small municipalities work together within the same governance framework, ensuring balanced regional development.
This Annex explains the calculations underlying Figure 4.4 and Figure 4.9, which illustrate how demographic change will further worsen the fiscal balance in Castilla y León over time. Traditional fiscal balance estimates typically do not account for demographic trends. Yet demographic shifts will likely increase spending on age-sensitive services, such as health, while reducing the size of the working-age population that contributes to revenue. The purpose of this analysis is to provide a more realistic picture of the region’s future fiscal outlook by taking these changes into account. While the following explanations are not necessary to understand the figures provided in the chapter, they are included for transparency and for those interested in understanding how the figures were derived.
Following the approach outlines by (IMF, 2016[35]), the impact of demographic change on the fiscal balance is estimated using a simplistic framework consisting of three steps: (1) estimating long-term output; (2) forecasting revenue based on its long-term relationship with output; and (3) forecasting expenditure items, distinguishing between those significantly impacted by demographics and others. Whilst the framework abstracts from potential behavioural changes and policy reactions that may arise due to demographic shifts, it provides a tractable and flexible method for highlighting potential impacts on public finances.
First, long-term output is estimated using a production function approach. Following the Cobb-Douglas production function with constant returns to scale, output is expressed as
1.
where is total factor productivity, is the stock of capital, is aggregate labour, and is the share of labour in output. Demographic developments are considered by decomposing into demographic indicators of various age groups. Specifically, in logarithmic terms, output is expressed as
2.
where indicates the age cohort, is the population of each cohort, and are the cohort-specific labour force participation rates and employment to labour force ratio, respectively, and is the weight factor to adjust for the difference between the number of employees and the effective labour input. Here, the analysis uses average usual weekly hours worked by age group to account for effective labour input of each cohort.
Capital stock is estimated using the perpetual inventory method
3.
where is the depreciation rate and is net capital formation. Here, the analysis uses a depreciation rate of 2.6%, in line with (IMF, 2016[35]).The initial capital stock is chosen so the capital-output ratio in the initial period is equal to the average capital-output ratio over a reference period of 10 years.
4.
Inputting relevant data, equation (2) can be used to derive estimates for total factor productivity (TFP). It should be noted that TFP is measured as a residual, capturing measurement errors in the data.
Forecasts for output can now be calculated given several assumptions: (1) TFP is assumed to grow at its historical average rate, (2) the share of labour in output is assumed to be constant, calculated as its long-term average; (3) the labour force participation rate and employment rate are assumed to follow the average rate of the 5 years prior to the forecast period; (4) the weight factor that adjusts for effective labour input is assumed to be constant, calculated as its long-term average; and (5) capital accumulation is assumed to follow the balanced-growth condition
5.
Based on these assumptions, output is determined by developments in demographic variables, using demographic forecasts of different age cohorts provided by the European Commission.
Government revenue is assumed to remain at its historical level as a share of GDP. Therefore, as output decreases, revenue is also assumed to decrease proportionally. This simple method abstracts from using data on age-specific tax liabilities, which is rarely publicly available. An important assumption is that the revenue-to-GDP elasticity is equal to 1, which may not be realistic if, for example, an ageing population results in an increase of the elderly paying taxes whilst not contributing to production, effectively increasing government revenue as a share of GDP.
Expenditures are calculated by differentiating between items likely to be significantly impacted by demographics and those that are not. Specifically, healthcare and education-related expenditures are modelled explicitly, given their significant susceptibility to demographic changes and their status as major expenditure components in the region.
Healthcare is expressed as the product of (1) the generosity of the healthcare package (GHP) for the working population, expressed as the per capita health expenditure for the 0–64-year-old cohort relative to GDP per employed person; (2) the inverse of the labour participation (LP) rate; and (3) the dependency ratio (DR) times a coefficient , which measures the per capita healthcare cost of the 65 year old and older cohort to the 0 -64 year old cohort. The equation is given as
6.
where
Assuming that the generosity of the healthcare package (GHP), the labour participation rate (LP) and the per capita healthcare cost of the elderly relative to the young () is constant, demographic shifts affect health expenditures through developments in the dependency ratio.
Other expenditure items are thought to be less affected by demographic change and are assumed to remain at their historical level as a share of GDP, similar to the calculation for revenue. Again, an important assumption is that the expenditure-to-GDP elasticity is equal to 1.
The assumptions of key parameters are summarised in Annex Table 4.A.1.
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