Financing The Balearics

I would guess that for many of you who just visit Mallorca or indeed for many of you who live here, the subject of regional financing is pretty arcane and dull. I wouldn't blame you for thinking that; it is both. But this doesn't disguise its importance.

The principal means of financing Mallorca and the Balearics are borrowing (of which there is a substantial amount and so therefore an equally substantial level of debt) and the money that comes via the system of tax revenue distribution. By means of a very simplistic explanation, revenue from income tax and VAT goes into a massive Madrid pot, and Madrid makes calculations as to how much should be repaid, having taken account of the various regions' (and its own) needs. So, the pot is filled by all the regions, some of which do very nicely out of the redistribution, while others do less nicely. The Balearics is a region in the latter category.

Certain other taxes, such as the tourist tax, are purely regional taxes. The Balearic government can therefore keep all of it, but in percentage terms it is a comparatively minor amount. However, and despite what the government might argue to the contrary, it becomes a general tax by the very fact of its inclusion in the budget. Yes, it may in theory and indeed in practice be earmarked for specific projects, but it is still a budget item that cranks up the level of revenue to compensate for the perceived shortfall that comes from the system of distribution.

There is an argument that the Balearics is a wealthy region which should show regional fraternity by helping out the likes of Andalusia (which receives an enormous sum) and Extremadura (generally considered to be Spain's poorest region). This, in essence, is what the current system is all about, and the argument is a sound one. But it fails to take into account the natural disadvantage of the Balearics, i.e. being islands some 250 kilometres from the mainland.

The financing system at present is overwhelmingly used to fund basic services. Health has the highest budget, followed by education, with social services and the environment (which includes of course water resources) some considerable distance behind these two. In a sense, it is predominantly working capital as opposed to funding for capital investment. There are other sources for this investment, but the belief in the Balearics is that the state is too miserly with these (and doesn't always cough up what it should do), therefore compounding the view that the financing system is inherently prejudicial to Balearic interests.

Key among the grievances is therefore what is available for infrastructure. While there are very rightful concerns about investment in water and sewage, there can also appear at times to be unnecessary special pleading. An example that is often cited is the investment in the high-speed train on the mainland. But Mallorca (or indeed the other islands) don't exactly need such infrastructure. Moreover, the history of state investment allocated to railways shows that Mallorca has been at fault. There was, for instance, state money for the network extension to Alcudia. It was ultimately withdrawn because politics intruded and no consensus could be arrived at as to the route for the extension.

Nevertheless, there are legitimate gripes about infrastructure, about transport and connectivity and about the added costs that arise because of insularity. In addition, the notion of Balearic wealth is one challenged by regional politicians. Once upon a time - back in the 1990s - the Balearics for a brief while topped the regional chart for per capita GDP; the ranking is now seventh. This can partly be explained by the scale of population increase, unmatched in relative terms by other regions, and the unevenness of personal wealth that is based on a predominantly seasonal economy. This growth has brought with it additional demands on services and infrastructure and so therefore the constant calls for a financing system that reflects the realities of the Balearics.

Ever since coming to power in 2015, President Armengol and government ministers have made the financing system a central theme of the administration. There is also the demand for a special economic regime (a revised one because what exists at present isn't special). While this embraces factors such as co-management of ports and airports (even more unlikely if there is further privatisation of the Aena airports authority), what it is essentially concerned with are fiscal measures to compensate the costs of insularity.

Getting both a fairer financing system and a special regime would constitute a major political achievement, which is why I mentioned this yesterday in the context of the 2019 regional election. Although there are good reasons to believe that Armengol will not be re-elected in any event, for the main opposition - the Partido Popular - there will be worries that getting a deal on financing would dilute its chances in 2019. The PP is therefore being placed in an awkward position. How politically can the PP make such a deal reflect well on it? Maria Salom, the new national government delegate in the Balearics, is doing the groundwork on this. The Rajoy government, because of its economic management, is now in a better position to deliver on financing and has, all along, wanted to do so; Brussels hadn't allowed it. We'll see.