Fiscal Balances and Regional Funding Santiago Álvarez García. Profesor Titular de Hacienda Pública. Universidad de Oviedo

06/03/2015

Fiscal balances measure the difference between taxes paid by taxpayers living in a given territory and the improvements arising from public spending on that same territory. Its calculation raises important methodological problems, since different criteria may be used when allocating tax revenues and government expenditure to each territory and, depending on the chosen approach, results may vary significantly.

Greater problems arise, however, from the political use of fiscal balances which, in recent years, have been used to support territorial demands. The best-known claims are those relating to the alleged tax plundering of Catalonia and the subsequent complaint on the so-called ‘fiscal compact’ adopted in July 2012 by the Parliament of that Community, in full secessionist euphoria.

Without falling into the temptation of using the inter-regional fiscal flows as a spurious justification for independence proposals or to question the original taxing power and the State's capacity in financial matters, there have been attempts to shift this issue to the system of regional funding, with the aim of influencing the final distribution of resources. Some have even blamed regional financing for the result of fiscal balances and have demanded that the funding model should offset other negative fiscal flows. Considering the review of the current funding model we should clearly separate these issues which, in my opinion, only serve to introduce–a biased–confusion in a matter which already lacks transparency.

Many of the economic actions of the public sector cannot be assessed from a regional perspective, as they reflect the result of personal income redistribution policies. It is individuals who pay taxes and benefit from the goods and services provided by the public sector. A tax system based on the principle of economic capability, combined with an equitable allocation of public expenditure (Article 31 of the Constitution), translates into positive fiscal balances for regions with lower levels of income and negative for those with a higher level of relative income. According to some calculations by Ángel de la Fuente, these actions represent about 2/3 of the cash flows generated by the activity of the public sector. Obviously, the degree of redistribution of public policies can be discussed, but it should be done from a strictly individual point of view, unless the intention is to delimit the scope of the spatial redistribution. Other public sector activities which cannot be allocated to territories are those relating to the provision of general public goods, which benefit equally all Spaniards, and to economic regulation and promotion.

If we remove these two factors, we reach public spending which can be allocated to a territory–a quarter of the total amount–where we must distinguish, in turn, between public investment by the Central Government and regional aid, and financing of territorial authorities, Autonomous Communities and local authorities.

In the former case, one may question the regional distribution of public investment, but one cannot ignore that Article 138 of the Constitution provides that the State shall ensure the economic balance of the various parts of Spanish territory, and 158.2 establishes a Territorial Compensation Fund to finance capital expenditures to correct economic imbalances between territories. In any event, as Article 134.1 of the Constitution establishes that the Government has the responsibility of drafting the National State Budget and the Parliament has to examine, amend and approve it, this is an issue that should be solved in Parliament.

We finally get to the question of regional funding which, as we have seen, has a minor quantitative importance than is generally considered in shaping fiscal balances between regions 

The financing system must guarantee the Autonomous Communities the necessary resources so that the provision of services they render is made on equal terms to all citizens, regardless of their place of residence. To cover these expenditure needs two elements are combined: their own tax capacity and the transfers for sufficiency and levelling. Introducing fiscal balances in regional financing actually involves questioning levelling policies which, obviously, give resources to Communities with a lower fiscal capacity.

That the funding model adopted in 2009 leads to an arbitrary distribution of resources between Communities and does not follow any equity criterion is obvious to anyone willing to examine their settlements–see FAES Papers 177.But it is also true that its review must correct funding differences between regions per unit of need, increasing the fairness and adequacy of the system. This is an issue that, again, bears no relation to fiscal balances, which should not contaminate the reform process.

Fiscal Balances and Regional Funding