The New Model Regional Financing System

A solution which is sometimes offered to Spain's economic woes is to do away with the system of regional government. The regions are a drain on national finances, they have spent money poorly, they have acquired vast debts. The arguments trotted out against the regions are familiar enough but they carry little force politically. There is no obvious will to reform the structure of regional government or to go so far as to eliminate it. Even were there such a will, there is one very major obstacle that would prevent it - the Spanish Constitution.

Instead, the focus has been on how to make the regions more financially efficient, and efficient financing is very much on the agenda at present, while the debate surrounding it may prompt a reconsideration of the nature rather than structure of regional government, making the regions more not less responsible for finance and creating what would be more a genuine financial and fiscal federal arrangement than the one which currently exists.

The Spanish Government has said that it will look at a reform of the present system of regional financing next summer. Certain regions, especially Madrid, want this brought forward; regional financing needs to be examined with greater urgency.

The financing of the regions is hardly a straightforward matter. The Aznar government tried to make it more straightforward in 2001 by introducing a reform which would have, it had hoped, stood for all time and taken away the regular, five-yearly rounds of negotiations which had only succeeded in generating political tensions. Almost from the moment the 2001 reform was introduced, it was apparent that it was unworkable. A weakness was to have assumed that one key factor in allocating national revenues to the regions - that of population increase - would be essentially evenly distributed. It was not, and the Balearics, by going through a boom in population, was a region which demonstrated just how uneven it could be.

The most recent reform was in 2009 by the Zapatero government. Under this reform the regions got more from the national tax revenue pot - 50% of income tax and IVA (VAT) for example. There were various funds set up, one of them called the Competitiveness Fund from which the Balearics has done quite well, and the system of equalisation between the regions was made more flexible and adjusted annually.

Though in theory all regions benefited to some extent from the 2009 reform, it was not without its critics. They focused on the political as much as the financial aspects of the reform, and politics have always played a part in how the regions' finances have been worked out. In 2009, the political criticism fell squarely on Catalonia. It had been pressing for a different financing arrangement and it got much of what it wanted, prompting attacks on the Zapatero administration for having in effect bought Catalonia's support.

The Catalonian dimension sours current opinion in several regions, especially those led by the Partido Popular and which make greater contributions to the overall revenue pot from which their finances are then redistributed. Madrid is one such region. The Balearics is another.

The starting-point for evaluating these finances is what the individual regions bring in from the tax-gathering function they perform for national government. In terms of tax capacity per head of population, Madrid stands in first position. Second is the Balearics; its tax raising per capita is three times greater than the region with the lowest capacity, the Canary Islands.

Based on 2010 figures, the Balearics had a tax capacity of 2,692 million euros. The final totting-up, which took into account different funds in addition to redistribution of income tax and IVA revenues, left the Balearics short by 300 million. Madrid was short by around 2,800 million. The issue of efficient financing centres, therefore, on what some regions believe to be unfair. They, in effect, subsidise other regions of Spain, and this has been an argument that Catalonia has long made as part of its claims for greater autonomy or even independence.

Regions like Madrid and the Balearics are politically very different to Catalonia and though they believed that they lost out to Catalonia under the 2009 reform (and still the system in operation), they have a similar gripe. It is because of this that the reform to be undertaken by the Spanish Government is seen as being potentially highly significant. Not only will it be political in addressing the vital issue of Catalonia's finances and so therefore the drive towards independence or not, it might just herald a move towards more of a fiscal federalist state, one in which, because it shouldn't be forgotten, there are two regions which operate in a totally different way to all the rest - Navarre and the Basque Country. They keep their tax revenues and hand over a percentage to national government. As such, they are not a part of the system of redistribution. Might they be the model for a new regional financing system?