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?

The Forgotten Islands Of State Investment

It may have slipped under the radar, and slipping under the radar may well have been what the regional government might have hoped. While it has been engaged in its war with the teachers, the national budget was announced, an element of which is the annual divvying up of state funds for investments to the country's regional administrations. The budget for the Balearics is down. Down again. President Bauzá might wish to make political capital by deflecting any blame from himself by casting blame on his masters in Madrid, but he is of the same party. He is party therefore to the philosophy of economic management through austerity. It's tough being PP regional president when you are so identified with the national strategy.

Hoping the budget might slip under the radar would be as a result of the criticisms levelled at the president last year. The opposition argued then that a paltry investment by Madrid was because of the inexperience of both Bauzá and the then finance minister Josep Aguiló. Regional presidents have to fight their corner, and fighting the corner has never been tougher than in these tough economic times. Yet, not all regions end up with sums as paltry as those destined for the Balearics and not all regions have this year seen a reduction to their budgets.

To be fair, the 5.7% cut to the Balearics budget is nothing when compared with the 25.5% reduction that Catalonia is going to have to endure. And before any conclusions based on Catalonia's arguments with Madrid are drawn from this substantial cut, it might be noted that quiet Asturias has had the largest cut of all - 31.6%. But percentage reductions tell only part of the story. While 5.7% is not too far away from the average budget reduction for the regions (7.1%), in absolute terms the Balearics investment budget is tiny. It stands at a little over 0.6% of the total investment directed by national government to the autonomous communities. Andalusia, as an example and as the recipient of the largest share of state funds, gets 17.3%, but then Andalusia is a pretty big region. A more meaningful comparison where the Balearics are concerned is with the Canary Islands. They are unhappy there, too. A fall of 4.8% is not, however, as great as that in the Balearics budget, while the Canaries will in fact receive a sum more than four times greater than the Balearics; it is 2.7% of the total investment to the different regions.

If one goes back to times before crisis, in 2007 the budget for the Balearics was 217.7 million euros, more or less three times higher than the 74 million that the islands will get in 2014. The Balearics budget has tended to be one of the lowest among the regions but not as low as it now is. Go back a further ten years to 1997 and while the amount was lower than in 2007 it was greater than those for Cantabria, Asturias, the Basque Country, Murcia and Extremadura. Each of these regions has since and for quite some number of years left the Balearics trailing a considerable distance behind.

There are many different explanations as to why the regions' budgets should be as they are and why there were as they were in the past, while over the period from 1997 to 2007 the Balearics budget fluctuated considerably between a low of 110.6 million euros in 1998 and a high of 265.3 million in 2003. An average of 205 million for the period has now been slashed by almost two-thirds, and by comparison with other regions the Balearics have in more recent years been dealt a far more parsimonious hand. The rot really set in in 2010 when the budget reduction for the Balearics was the largest for any region - almost a quarter - and it has been falling ever since.

Bauzá cannot therefore be blamed for what was a trend before he became president. It may be that inexperience might have led him not to have pressed for greater investment last year, but he now has more experience as well as the experience of the criticism that came his way because of last year's low budget. But there may be some justification for one explanation advanced for the low budget - that Bauzá is simply too compliant with Madrid in all sorts of ways. Were he more awkward or awkward at all, he might and so the Balearics might fare better. Or perhaps there is another explanation, one offered by the region's finance minister, José Vicente Marí, that in Madrid they have forgotten that the Balearics exist.

The Spanish Regions' Nuclear Option

The document that sets out the Spanish Constitution conveys an astonishing pretension of antiquity. Colourful, florid heraldry meets a robust calligraphy in bestowing on the Spanish Kingdom the "Constitución Española". The document is only 34 years old, but it could as easily be many centuries old. Of its contents, certain aspects had appeared in previous versions, one of which was the right to regional autonomy. The Republicans of 1931 introduced the concept, but they never had the time to implement it.

The constitutional impulse in granting autonomy was largely one of tackling the centuries-old claims of historical states within Spain - Catalonia, The Basque Country and Galicia. As soon as the autonomous cat was let out of the bag when the Constitution was in its drafting, Andalucía discovered a previously incoherent claim on quasi-statehood, and the autonomy that followed, which led to the creation of the 17 regions that included the Balearics (plus eventually the two autonomous cities of Ceuta and Melilla), became inevitable, as much by default in satisfying the claims of the historical states as by having been conceived as a laudable system of decentralised administration.

This decentralisation has been held up as an almost perfect governmental system. Or rather, it once was held up as being so. The perfect system cannot exist, and it clearly no longer does in Spain. Regional debt has been the underbelly that has softened Spain's finances to the point that the belly, starved of monetary nutrition, has suffered a prolapse. Valencia needs a bailout, so does Murcia, and Catalonia has admitted that it might do as well.

Prescriptions for tackling regional debt are as many as those for dealing with the debts of Spanish banks, and many are simplistic in that they disregard the institutional barriers to effecting them. One, that of just doing away with the regions, would, apart from the practical nightmare it would entail, run up against the  calligraphy of the constitutional "carta magna".

The Spanish Constitution is not beyond change, but changing it in any fundamental way would be hugely difficult, and it would require a constitutional nuclear option if the current system of autonomy were to be done away with completely.

However, the Constitution makes it clear that the autonomous communities are not above intervention that goes beyond simply handing them a bailout. Article 155 of the Constitution states that if an autonomous community does not fulfil its obligations or acts in a way that seriously prejudices the general interests of Spain, the government may take measures necessary to compel communities to meet these obligations.

Article 156 grants the regions financial autonomy, so long, however, as this complies with "principles of co-ordination with the state treasury and the solidarity amongst all Spaniards". It is these two articles which give the national government authority to in effect take over the financial running of an autonomous region, but neither establishes a principle by which a region could be merely done away with.

Theoretically, Madrid could decide that all the regions are acting in ways that are prejudicial to national interests. Rather as the establishing of the autonomous regions under the Constitution avoided complications that a piecemeal approach might have created, so a uniform approach to financial intervention might in a curious way be more palatable. But whether intervention were on a case-by-case basis or across the board, the consequences would be the same. With financial autonomy stripped away, the regions would have a diminished reason to exist. The structure of regionalism wouldn't necessarily collapse, but it would be severely weakened.

The political fallout from intervention could, though, be dramatic. A regional president and government may well feel compelled to resign, but who would wish to replace them, unless there was some assurance that financial autonomy could be regained? More than this, however, is the potential for an undermining of the Spanish state and kingdom, always rather shaky in any event because of those historical claims. Which would bring the Catalonia issue in particular right back into the frame. Catalonia may be hugely in debt and so would seem mad to wish not to possibly avail itself of the new national fund to bail out the regions, but it has also long been one of Spain's principal providers, if not the principal provider.

Economic crisis has demanded a hell of a lot of soul-searching as regards Spain's entire system of public administration. One fancies we are nearing the end game, but the question is what this end game will be. The Constitution's calligraphy is suddenly looking less robust.


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