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Home » Content » In Spain we are a long way from the German federal model
Maite Vilalta, the expert on regional funding points out that the Spanish model is "unitary-inspired" and that equality takes precedence over autonomy, which is the opposite of what happens in a federal model

MANEL MANCHÓN 01.12.2019

Maite Vilalta, vice-rector of the UB, expert on regional funding, in the interview with ‘Crónica Global’.

Maite Vilalta (Manlleu, 1962) is one of the leading experts on regional funding. She holds a PhD in Economics from the University of Barcelona, is a tenured lecturer at the University of Barcelona, and is currently vice-rector of Equality and Social Action at the UB. Vilalta regrets that with the financing of the autonomous regions, politicians have thrown their heads in the sand and calls for academics to have more of a voice, making it clear that there are different interpretations and models. She is a member of the Barcelona Institute of Economics (IEB) and was a member of the Group of Experts appointed by the Government of the Generalitat to calculate the fiscal balance of Catalonia (2005 and 2008) with the former Minister of Economy, Antoni Castells. She was also a representative of the Generalitat in the Comisión Mixta de Transferencias Estado-Generalitat. In this interview with Crónica Global, he states that the Spanish State model maintains a “unitary inspiration”, and that much more could be done for the communities to have true autonomy. In this sense, he is clear that in Spain “there is still a long way to go for a federal model”.

–Question: The Spanish government that is formed will have to implement, among other things, a new model of autonomous financing. What should it incorporate in relation to all the regions, and especially with regard to Catalonia?

–Answer: It would be desirable that, fundamentally, the changes that are introduced should help to continue moving towards a model based on two fundamental pillars: the tax pillar, which should guarantee that practically all autonomous community revenue comes directly from taxes paid by citizens, over which the autonomous communities should have maximum autonomy; and the pillar of a levelling mechanism that would prevent autonomous communities with less fiscal capacity from being forced either to provide a manifestly unacceptable level of services or to demand an equally unacceptable fiscal effort from their citizens. At the same time, the overall volume of the system’s resources should be revised upwards in order to solve the problem of the existing vertical imbalance.

–What imbalance?

–We have data indicating that the distribution of revenue between the central government and the autonomous governments as a whole is not adequate, if we take into account the powers attributed to both levels of government. There has been a break in the balance existing in the base year of the model (2009) in favor of the central government. And the failure to review it when it was due (five years ago!) has only widened the gap. Measures are also needed to guarantee the stability of the model and mechanisms to facilitate coordination, both technical and institutional, between the regional governments and between them and the central government. And all of this would be of no use if compliance with what has been agreed is not ensured in the exact terms in which it has been agreed (institutional loyalty).

–And what about Catalonia?

–And as for Catalonia, we could say that perhaps these would have been, in a situation of “normality”, the changes that would have allowed it to continue within the general model. In Catalonia there was a broad consensus on the financing model. It was perceived, by most Catalan political forces, as one of the main pieces of the fit with the Spanish state. And, in fact, Catalonia had always played a very active and proactive role in the construction of the model that was being designed: a model of clear federal inspiration. Today, the situation is quite different. A large majority of the citizens of Catalonia (80%) are dissatisfied with the current autonomous state and, around 48%, think that independence is the best solution. Thus, for political Catalanism, the financing model has almost disappeared from its agenda. If we add to this the fact that, according to CIS data (July 2019), 31% of the Spanish population (excluding the Basque and Catalan populations) would like to see recentralisation (either by abolishing the autonomous governments or reducing their autonomy) and 44% are already happy with the current state of affairs, agreement is difficult when it comes to revising the model. Unless we learn from those who have also faced similar situations to ours, and we see that the main starting point has been the recognition of the different and have been able to accommodate the preferences of a minority, designing an asymmetrical model of fiscal federalism. I sincerely believe that the review of the model could be a good opportunity to show that there is a willingness to recognise the plurinationality of the Spanish State and, therefore, to recognise certain specificities that, apparently, only Catalan citizens want (Basque citizens are already satisfied with their current financing model). Catalonia should not impose the model it wants on the other autonomous communities, but neither should the latter prevent it from having it.

–The model in force is the one agreed in 2009. Did it really mean progress for all the autonomous regions? And for Catalonia?

–The model agreed in 2009 meant progress in several areas. These could be listed: some 11,270 million euros were added to the system as a whole; the tax basket of the autonomous governments was expanded so that 88% of their resources now come from taxes; and a levelling mechanism was designed, the Fund for the Guarantee of Fundamental Public Services (FGSPF), whose purpose is to ensure that the autonomous communities have the same volume of potential resources per inhabitant (adjusted) for the provision of the essential services of the welfare state (education, health and social services). The result is a partial equalisation of resources (75%): the autonomous communities that have above-average (adjusted) per capita tax revenues (in index) continue to do so once the FGSPF has been implemented, but the gap narrows. The same happens with those that are initially below the average, which are still below, but less so.

–Were there other mechanisms?

–Mechanisms were also established for updating the different variables involved in calculating the FGSPF and the rest of the funds in the model. The requirement to review the model every five years was restored (the previous agreement, in 2001, had eliminated it). One of the main imperfections of the 2009 agreement was the introduction of three additional funds: the global sufficiency fund, the competitiveness fund and the cooperation fund. Their application distorts the redistributive pattern established by the Guarantee Fund and the results are once again difficult to defend from an equitable point of view, as was the case in previous models, and they also introduce a great deal of opacity into the system. In reality, the status quo that existed previously was being continued, so that those communities that were disadvantaged continue to be so today (the situation of the Valencian Community is particularly noteworthy). For Catalonia, the new model meant several things: a considerable increase in resources, around 3.7 billion euros, a figure much higher than the previous status quo. 3.7 billion euros, a figure much higher, for example, than that corresponding to the increase in resources that the implementation of the previous model (introduced in 2001) entailed, which was 240 million euros; the tax basket that was generalised is that provided for in additional provisions 7-12 of the 2006 Statute of Autonomy of Catalonia; and the Guarantee Fund responds to the postulates provided for in article 206 of the Statute which, by the way, some were considered unconstitutional by the Constitutional Court in its 2010 ruling. We could therefore affirm that the agreed model meant an increase in the Generalitat’s resources in absolute terms and a significant advance towards a model based on the two main pillars described above: financial autonomy and equity.

–What went wrong, then, in the years that followed? The specific funds that were created to satisfy different autonomous regions?

–Indeed, these funds distort both the functioning and the results of the model. While it is true that the structure of the model agreed in 2009 represented a qualitative change with respect to previous models, and made it a little more comparable to those that have so often been taken as a reference, its application has not been as expected, and the results were not entirely satisfactory during its first years of life. This is mainly due to three factors. Firstly, the model’s own inadequacies, in particular the still insufficient financial autonomy of the autonomous governments, the distortions caused by the three adjustment funds mentioned above, and the lack of transparency; The second factor has to do with the economic crisis, which caused, precisely when the model was taking its first steps, a sharp fall in tax revenues, the existence of significant budget deficits and cash flow problems; and the third factor is due to repeated breaches in its application (non-review, delays in transferring the agreed resources, non-payment of the competitiveness fund when due, etc.). ). Perhaps too many things are failing: the structures – technical and institutional – that should ensure adequate coordination of government decisions, the mechanisms that should provide transparency and stability to the model, and the institutions that should ensure compliance with what has been agreed. And to all this, we should add another problem, that of the coexistence of this model with that of the foral autonomous communities. The latter enjoy a very high degree of financial autonomy and do not participate in any equalisation mechanism, which, together with the procedure used to calculate the quota, allows them to have almost twice as many resources per inhabitant as the average of the rest of the autonomous communities.

–How can we distinguish the level of funding that Catalonia has, whether it receives or what it needs in terms of its competences, from the question of fiscal balances?

–It is a serious mistake to use the fiscal balances as a criterion for assessing the Generalitat of Catalonia’s funding model. The model will be “good” or “bad”, depending, firstly, on whether or not the amount is adequate to cover the spending needs involved in exercising its powers, and, secondly, on whether or not this amount is obtained by complying with certain economic-constitutional principles: financial autonomy, vertical balance, horizontal equity, transparency, stability, coordination, institutional loyalty, etc. A fiscal balance simply gives the result of the difference between the resources that Catalonia (not just the Generalitat!) receives from the central State administration and those that Catalonia contributes to that administration. This difference, as one would expect from a relatively rich territory within the state, is negative. In other words, Catalonia contributes more than it receives. It has a fiscal deficit. It would be another matter to discuss whether or not it is too high, most indicators show that it is, but that would divert us from the subject. You ask me about the relationship between the financing model and the fiscal deficit. Well, the Generalitat’s financing model only explains part of this deficit. Not all of it is attributable to the functioning of the model. Some examples may serve to illustrate this: Catalonia’s fiscal deficit could be reduced if the central government were to increase its investment spending in Catalonia, but this improvement would have nothing to do with an improvement in the resources in the hands of the Generalitat’s government to be able to provide the powers assigned to it. The fiscal deficit could also be reduced, for example, by transferring more subsidies to the Generalitat. This would be related to the Generalitat’s financing model, but it would be an undesirable path, as it would increase the Generalitat’s dependence on the central government and would not lead to any improvement in terms of financial autonomy. Catalonia’s fiscal deficit could also be reduced if the unconditional subsidy that Catalan municipalities receive from the central administration were increased, but this improvement would also have nothing to do with an improvement in the resources in the hands of the Generalitat government.

–So?

–The fiscal deficit in Catalonia improves, i.e. is reduced, when the number of unemployed in Catalonia increases and the central government has to pay a greater volume of unemployment benefits. Evidently, this has nothing to do with the financing model either; and we could go on giving examples that show that Catalonia’s fiscal deficit can be explained by many other factors, which have nothing to do with whether or not the Generalitat has a good financing model. We could conclude that an improvement in the Generalitat’s financing model should be reflected in an improvement in the fiscal balance; however, an improvement in the fiscal balance does not necessarily have to be related to an improvement in the Generalitat’s financing model. Fiscal balances are very useful insofar as they reflect the result, at the territorial level, of the central administration’s redistributive policy, and this is produced through various channels, and regional financing is one of them. But that is all.

–Can it now be said that the Generalitat has bad financing?

–The failure to revise the model when it was planned has caused, on the one hand, a break in the balance agreed in the base year, so that, as I indicated earlier, the amount of resources currently provided by the model to the Generalitat (20,976 million euros in 2017) is clearly insufficient. On the other hand, although the 2009 agreement was a very important change, there is still much room for improvement if we look at the statutory text itself. The 2009 agreement was not a full stop. It established the architecture of a system which, as happens in all models of fiscal decentralisation, even those that work best, need to be reviewed and updated so that, firstly, they continue to work properly and, secondly, so that they can adapt to the new realities and aspirations of the population. It could be said that the provisions of the Statute are not yet fully developed. For example, the Statute stipulates that the Generalitat must have the capacity to make decisions on all the taxes that make up its tax basket. This has not yet been fulfilled. Although it has been ceded some regulatory capacity over direct taxation (50% of personal income tax, inheritance and gift tax, wealth tax, etc.), it has none over indirect taxes such as VAT or excise duties (tobacco, alcohol, hydrocarbons, electricity, etc.). There is also significant room for improvement in the administration and management of taxes: the Statute (Article 204) provides for the existence of a Consortium formed by the Catalan Tax Agency and the State Tax Agency, which should act as a one-stop shop for the administration and management of all taxes paid by Catalan citizens. This has not been developed either. The variables used as indicators of the Generalitat’s spending needs in the current formula for calculating the Guarantee Fund could also be improved.

–For example?

–For example, a variable should be included, as provided for in the Statute, to capture the differential costs in the provision of services. The tax basket currently provides the Generalitat de Catalunya with a potential tax revenue of 124 (adjusted per capita index), placing it in third place after Madrid and the Balearic Islands. Once it has participated in the equalisation mechanism, the Fund, its revenue per inhabitant (adjusted) falls to 105, and once the other funds in the model have come into play, it falls to 100. The order has been changed. This should also be corrected; and there are also aspects of the functioning of the model, of its day-to-day operation, which need to be rethought, for example, the system of “payments on account”. In relation to your question, another no less relevant issue should not be forgotten. The improvements I have just mentioned are those that could be made within the framework of the provisions of Title VI of the Statute, however, it should be mentioned that, in July 2012, the Catalan Parliament approved, with a very large majority of votes, a document that was to serve as the basis for negotiating a new funding model, clearly inspired by the foral model. Never before had Catalonia demanded the same (or a similar) model to that of the foral communities. The agreement reached in 2009 was therefore considered to have been amortised. If this were the reference point to be considered, then the current situation would be far removed from it, given that, if the Generalitat had a model similar to the foral model, it would have a very broad financial autonomy, would not participate in any solidarity mechanism and would enjoy much greater resources than the current model provides it with.

–But what about the town councils and provincial councils? Do they receive what they need?

–Yes, this happens precisely when the financing of the Generalitat is incorrectly linked to the fiscal balances, as we said before. It is clear that this country needs to rethink the role and the weight we want local governments to have within the public sector as a whole. A reform of the territorial organisation is required that makes very clear both the role of the municipalities (most of which are very small) and that of the supra-municipal bodies. It is necessary to define a framework of competences for local governments. And when this is clarified, a reform of their financing model should be undertaken. A model that was designed on the basis of a 1988 law (more than 30 years ago!) that was only partially reformed in 2002. The local financing model should also make financial autonomy compatible with equity.

–What analysis can be made of the very academics who first spoke of fiscal balances, and is there any room for self-criticism because these arguments have since been used by pro-independence politicians?

–The calculation of a fiscal balance is, in reality, a very academic exercise. You need knowledge of tax incidence and expenditure incidence to do it. There is no one way to do it, the economic literature provides different methods and approaches, all of them valid, but each of them explaining different economic effects. There is no right and wrong method, they are not substitutes, they are complementary, although one method is more methodologically complex than the other. The use of one or the other depends on the approach to the analysis to be carried out. What is true is that the differences between the figures obtained using one or the other approach are significant. What has happened in our country is that, for some, those who want to show that Catalonia suffers a very high fiscal deficit, only one of the approximations is good, while for those who consider that there is not so much, only the other approximation is good. The data have not only been used by pro-independence supporters, as you suggest in your question, but also by those who are not. We could say that there is the “neutralised cash flow” camp (pro-independence) and the “non-neutralised profit flow” camp (non-independence). Both sides have highlighted only those results that are most convenient for them. And so we have witnessed a sad and absurd war of figures, since, using the most common comparative parameters, it can be seen that the figures, although different, show a high fiscal deficit in all cases.

–What does that mean?

–In my modest opinion, all this has done is to take academic rigour out of the debate and political legitimacy out of the use of data for free. The role of academia should be, in my view, to offer knowledge as honestly as possible. Explaining in a transparent way how the data is obtained, what assumptions are being used and why. It is good that we discuss at an academic level how to approach issues, that we know how to defend scientifically the hypotheses we use and the results we obtain, that we exchange literature and that we learn from each other’s experiences. That we doubt what we have learned and ask ourselves the same questions again, incorporating new approaches. I believe that this is what society expects from us. Only in this way can we contribute to enriching the debate, not impoverishing it. And from here it is inevitable that data will be used politically. It happens in this and in many other issues. It should be the citizens, properly informed, who should know how to “separate the wheat from the chaff”. But this can only happen with a sufficiently educated citizenry and with academics who really stake our prestige on what we write and what we defend, not before the media, but only and exclusively before the academy.

The UB’s Professor of Autonomous University of Barcelona, an expert on autonomous financing, in the interview with Crónica Global.

–Aside from the political conflict, have bridges been broken in the academic sphere between those who have dedicated themselves to the study of autonomous financing?

–As I pointed out earlier, in Catalan politics, the financing model has ceased to form part of the agenda of those political parties that, at this moment in time, represent a large majority of Catalans. Well, we could say that in the academic sphere this issue has also ceased to be, for some, its main object of study. The academy has undoubtedly played, since the 1980s, an important role in the construction and design of the current funding model. However, at a time when secessionism in Catalonia is seen as a possible alternative in the collective imagination, it is logical that the academy should be interested in learning about and exploring new issues and building new theoretical bodies (such as the economics of secession). In some cases, this has meant abandoning bridges and building new ones. But in any case, we have never ceased to debate academically among ourselves, nor to participate in sessions and working days in which we have been able to contrast different ways of analysing the same reality. This, far from being a problem, should be seen as a value.

–Can it be said that, in terms of funding, Spain is very similar to a federal country like Germany?

–It could be said that the model of regional financing that has been built up is of federal inspiration and perhaps, more specifically, of German inspiration. This is because a model of territorialised shares in the main taxes of the fiscal system (personal income tax and VAT) was chosen, and because of the desire to implement a levelling mechanism for the resources of the autonomous communities that would approximate the one that the Länder have had until now (an important reform of this has come into force this year). Although it is true that the differences are significant, in Spain we are still a long way from the German federal model.

–Why?

–For example, the autonomous communities do not have any share in corporate tax, but the Länder do. The management and administration of all taxes paid by Germans is carried out by the Länder, unlike in Spain, where the main taxes (personal income tax, VAT and special taxes) are managed centrally by the State Tax Agency. The Länder do not have regulatory capacity over the taxes in which they participate, but the German Senate (the Bundesrat) is a real territorial chamber in which any measure, including those of a tax nature, proposed by the Federal government and affecting the interests of the Länder, is discussed and voted on. There are limits on levelling to prevent the initial positions from being reversed (ordinality principle). Our model, although highly decentralised, is still basically a unitary-inspired model. The basic difference between a unitary conception and a federal conception is that, in the former, equality clearly prevails over autonomy. In a unitary state, citizens have a tax relationship almost exclusively with the central government. In other words, they pay their taxes to the central government, which has the regulatory power over them and manages and administers them, as is still the case, for the most part, in Spain. And then it allocates part of these taxes to the sub-central governments, so that the only relevant questions are: the overall volume to be transferred and its distribution among the different governments (based on some indicator of needs).  On the other hand, in a model with a federal conception, a very precise and, no doubt, always complicated balance is sought between autonomy and equity. The prevailing idea is that what characterises a government is precisely its capacity to obtain resources from the taxes paid directly by its citizens in order to be able to provide them with services. It is then that equalisation mechanisms are established to mitigate unacceptable situations of inequality. These are therefore two opposing conceptions. The type of decentralisation that has taken place in Spain, although inspired by fiscal federalism, is still far from being achieved. The characteristics that define a unitary state still prevail. Decentralised is not synonymous with federal.

–What would it lack in this respect to be a truly federal country?

–First of all, it would lack a federal culture. Federation is based on the recognition of the parts, on the conviction that union between different parts is worthwhile. In a federal state (I’m thinking of the USA, Canada, Germany, Switzerland, Australia…) the autonomy of the governments that make it up is prioritised and not everyone is expected to do the same thing and have the same thing at the end of the day. This is not the principle of equality that is defended in a federal state, as I have pointed out above. Secondly, once this culture has been acquired (or in the meantime), a major reform of the Constitution should be undertaken to enable the necessary structures to be put in place: a Senate that would be a true Chamber of territorial representation, a clear separation of the areas of competence corresponding to the federal government and the federated states, a taxation power shared between the federal government and the federated governments, a local regime linked exclusively to the federated states, a financing model for the federated states that, while based on the principle of financial autonomy, would be made compatible with some principle of equity, with technical and institutional mechanisms that would facilitate and ensure adequate coordination between the governments, and so forth.

–Should the question of the foral communities be resolved, or is it a question of calculating the quota better, with specifically technical criteria?

–The coexistence of different models, the foral and the common system, should not lead to such a big difference in the results provided by both: the Basque Country has more than 70% more resources per inhabitant than the average of the common system communities. There are academic proposals that indicate how to achieve this. The difference between the results of the two systems can be explained by several clearly identified factors. Technically, it would be possible to find a way to close the gap, but this is an issue, like all those mentioned in the previous answers, which can only be resolved in the realm of politics.

https://cronicaglobal.elespanol.com/pensamiento/conversaciones-sobre-cataluna/maite-vilalta-espana-lejos-modelo-federal-aleman_295298_102.html

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