The reason for Catalonia’s debt

Article written by Nuria Bosch, published at Diara Ara (english), March 29th 2016.

I often meet people who ask me how come Catalonia is one of the most indebted regions in Spain. According to data published by the Bank of Spain towards the end of 2015, Catalonia is the Spanish region with the third highest public debt to GDP ratio: 35,3 per cent. The average in Spain is 24.2 per cent.

In the face of this, first we must remember that the finances of every Spanish region were badly hit by the economic downturn. Revenue from capital gains tax from property sales —a tax that is fully devolved to Spain’s regional governments— plummeted as a result of the real estate meltdown, which impacted the regional finances negatively.

In 2000, the Catalan government’s public debt was at 8.3 per cent of its GDP, dropping to 7.8 in 2007. But this was the last year of fair wind for the economy and Catalan debt shot up from then on. By 2011 —four years later— it had hit 22 per cent of GDP. It has kept growing since, albeit at a slower pace, all the way to today’s level (35,3 per cent). To a greater or lesser extent, all Spanish regions have gone through this process.

Secondly, the regional funding system in Spain is exceedingly deficient and Catalonia clearly comes out the loser. The figures for 2013 —the last official batch of data to be published— show that the current system provided the Catalan administration with €2,075 per capita, whereas the regional average is €2,128. The exact same system would yield €2,298 per capita, if there were no contributions to the interregional solidarity kitty. In contrast, funding per capita is much higher than average for some regions. For instance, Extremadura’s €2,572 per capita would drop to €1,482 were it not for the additional income transferred on account of interregional solidarity. Needless to say, some solidarity between regions is to be expected; but in Spain’s case, it is ill-conceived, excessive and arbitrary.

Additionally, Spain’s central government —which, as the chief tax collector, is expected to provide over 80 per cent of Catalonia’s funding— makes a poor job of it, with insufficient advance payments and delayed transfers, which lead to further indebtedness.

Therefore, you could argue that the inadequacies of Spain’s regional funding system are one of the economy’s structural problems. After over three decades of devolved regional governments, they have failed to come up with a sound, long-lasting model. Spanish regions are in the red (their ordinary spending is greater than their income); this proves that the funding they receive does not meet their spending needs, which include all basic welfare services (except unemployment benefit and payment of pensions).

Still, someone could claim that the lack of funding might conceal a case of poor management of public resources. This is not easy to ascertain, but we can readily show that there is a negative correlation between the most heavily indebted regions and those whose funding has been below average, historically speaking. In other words, the fewer resources, the greater the debt and vice versa. Valencia, the Balearic Islands and Murcia —as well as Catalonia— have traditionally got the short end of the stick with the current finance system and they are also the most indebted regions in Spain. Valencia has the highest public debt to GDP ratio: 41,3 per cent; the Balearics ranks fourth after Catalonia, at 30.4 per cent, with Murcia taking the fifth spot at 27.3 per cent.

Two exceptions to this rule stand out.

 

Read the rest of the article here.

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