BBVA studies question Spain's inter-territorial fiscal scheme, which funds the regional governments

Barcelona (ACN).- The Autonomous Community governments, such as the Catalan Executive, cannot meet the deficit objectives imposed by the Spanish Government because of the current inter-territorial fiscal scheme, according to a study from the Spanish banking giant BBVA. The bank has published two studies on two consecutive days that shed some light on this scheme and its consequences for the Autonomous Communities, basic public services and citizens' lives. In the first report, the BBVA Foundation and the Valencian Institute of Economic Studies (Ivie) – which is the co-author – state that spending per capita on basic Welfare State services, such as healthcare and education, varies by 60% among the 17 Autonomous Communities. In 2013, Asturias spent €8,531 per capital on these basic social services, while the Balearic Islands spent €5,432. The Spanish average was €6,230 per person, while in Catalonia spending per capita was €6,640. In terms of healthcare, Catalonia is the Autonomous Community, with the 4^th smallest spending per capita and with spending in 2013 standing at 2004 levels.

A second report from the BBVA Research department highlights that the Spanish Executive reduced the funds for the Autonomous Community governments in 2014, despite the economic situation having improved and Spain's public revenue having increased (as a result of a better economy and greater taxes), as the economist Rafael Doménech, who co-ordinated the study, stressed. Doménech explained that the effects of the economic situation's improvement will arrive with about a two-year delay due to the current design of the inter-territorial funding scheme, where the final transfers are calculated with figures from two years previous. Therefore, it can be inferred that the Spanish Government, which is aware of this consequence, is not trying to correct it and is currently keeping the difference for itself.

Furthermore, the inter-territorial funding scheme, run by the Spanish Government, does not provide regional government with enough funds. The fiscal situation for the regional governments is getting worse since the Spanish Government refuses to start reviewing an inter-territorial fiscal scheme that legally expired 16 months ago (on 1 January 2014) and that was designed before the financial crisis and its effects on the public finances. According to the BBVA, the current system has provoked "an artificial worsening" of the Autonomous Communities' meeting of the deficit targets.

The Catalan Government has been asking for the revision of this model since mid-2012. However, the Spanish Government has systematically refused to do so and has not even started the talks for setting up a new scheme. Furthermore, the Catalan Executive has also protested against the strict and unrealistic deficit targets imposed by Spanish Government on the Autonomous Communities, as well as its unfair distribution of deficit targets among the different government levels existing in Spain. In 2014, the Autonomous Communities had only 15% of the allowed deficit while being in charge of managing 33% of Spain's public money. It has to be noted that Spain's regional governments exclusively fund and manage the main basic public services; therefore, a drastic reduction of their funds has a direct effect on the amount of funds available for healthcare, education and social services.

The two BBVA studies provide further evidence for criticising the unfair funding scheme of the Autonomous Communities, the unfair budget reduction distribution among the different government levels and how the Spanish Government is recentralising powers by reducing the resources of the regional executives, at the expense of the quality of public services.

Autonomous Communities cannot meet deficit target due to the inter-territorial fiscal scheme

In a report compiled by the group's research department and published on Tuesday, the so-called BBVA Research highlighted that regional governments were not able to globally meet the 1% deficit target for 2014 imposed by the Spanish Government due to the lack of funds from the inter-territorial fiscal-scheme, which is also run by the Spanish Government. Despite the significant budget cuts carried out by the Autonomous Community governments over the last few years, many regional executives cannot meet the strict deficit targets.

According to BBVA, the problem is not an insufficient spending reduction, but rather that regional government's revenue is insufficient for the basic services they manage and fund. Around 90% of the revenue earned by the Autonomous Community government comes from direct transfers from the Spanish Government. Regional governments have very limited powers on taxation and, on many occasions, particularly in Catalonia's case, these powers are overruled by the Spanish Executive's own taxes, measures and appeals against them.

60% difference in spending per capita on public services

On Monday, BBVA had published a first report, together with the Ivie, analysing the differences among the 17 different Autonomous Communities in terms of spending per capita. The study highlights the budget cuts undertaken by the regional governments to reduce public deficit, and found that the current inter-territorial fiscal scheme has provoked up to a 60% difference in the Autonomous Community spending per capita on basic Welfare State services, such as public education and healthcare.

In terms of healthcare, Catalonia spent €1,322 per capita in 2013, while the Spanish average was €1,357. The Catalan spending from 2013 is at similar levels to the resources per capita in 2004, with budget cuts starting in 2010 and piling up ever since. In a worse situation than Catalonia there is Andalusia (€1,182), the Balearic Island (€1,274) and the Valencian Country (€1,301), also called the Valencian Community. On the other extreme there is Asturias (€1,714), the Basque Country (€1,621) and Cantabria (€1,530), which top the ranking.

Regarding spending on education, Catalonia is also among the Autonomous Communities with the smallest amount per capita, with €890 per person. The Spanish average is €914. The Region of Madrid spends €790, the Balearic Islands €830 and the Valencian Country €866. The Basque Country tops the ranking, with €1,223, followed by Navarra (€1,106) and Asturias (€1,066).

According to the BBVA study's conclusion, there are several reasons for such a difference. One is whether the Autonomous Community has their own economic agreement with their own fiscal policy and tax collection system (the Basque Country and Navarra) or whether they belong to the common system, where the Spanish Government collects the taxes and then distributes the money following the inter-territorial funding scheme (applicable for the rest, including Catalonia). Besides this, the demographic distribution, the geographic distribution of people and the level of prices are also reasons behind such differences. However, BBVA also states that insufficient funds from the inter-territorial funding scheme and political decisions regarding this system are also among the causes. In this sense, the study points out that the levels of revenue are "decisive", as the better an Autonomous Community is funded through the inter-territorial funding scheme, the greater the amount of resources it has for healthcare and education.

Catalonia has had an 8.5% average annual fiscal deficit for the last decades

Several studies, including one from the Spanish Ministry for the Economy from 2008, have pointed out that Catalonia is the territory that contributes the most in absolute terms to regional solidarity. In fact, the transfer of money from Catalan taxpayers to other parts of Spain (money that does not return to Catalans in the form of investments or services) represents some 8.1% of Catalonia’s annual GDP as average, the equivalent of about €16 billion annually. According to a Catalan Government study, this practice has been going on since 1986 at least. On top of this, after the redistribution, Catalonia ranks much lower in terms of money available per capita than poorer regions, which seriously damages Catalonia's less-privileged families, as well as the Catalan economy's competitiveness.