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IEB’s IV Fiscal Federalism Report: Experts in Public Economics warn that the response to the crisis has led to substantial recentralization

Professors Núria Bosch, Albert Solé-Ollé, Santiago Lago, Carles Viver, Jorge Martínez-Vázquez and Gustavo Canavire identify a process of recentralization including such measures as local government reform, the setting of a deficit objective and the 2011 reform of the Constitution

The experts deny that all processes of decentralization impede attempts at finding a way out of the crisis, but they recognize that severe problems have become manifest in the Spanish system and these must be corrected

 The report casts doubts on the effectiveness of local reform in Spain

The IEB’s IV Fiscal Federalism Report draws attention to the process of recentralization that the Spanish state is experiencing following entry into the economic and budget crisis. This process has been identified by the Professors of Public Economics, Núria Bosch and Albert Solé (UB-IEB), Santiago Lago (University of Vigo), and Jorge Martínez Vázquez (Georgia State University) and experts in Spain’s Law of the Autonomous Communities, including Carles Viver Pi-Sunyer (Institut d’Estudis Autonòmics). The study highlights recentralizing measures such as deficit control, proposals for local government reform and the 2011 reform of the Constitution.

The IEB’s IV Fiscal Federalism Report is published each year by the Barcelona Economics Institute, the University of Barcelona’s centre for research in Applied Economics. Coordinated by the Professors of Public Economics, Núria Bosch and Albert Solé Ollé, the report includes contributions from prestigious experts at various universities and research centres around the world.

Response to the crisis and recentralization
In the report, the Professors of Public Economics, Núria Bosch and Albert Solé (UB-IEB), Santiago Lago (University of Vigo) and Jorge Martínez-Vázquez (Georgia State University) and legal experts Carles Viver Pi-Sunyer and Gerard Martín (Institut d’Estudis Autonòmics) note that the measures adopted in response to the crisis have led to the recentralization of the Spanish state.

Santiago Lago (University of Vigo) entitles his article "New budget stability in Spain: a recentralizing approach". In the article he claims that the government could have tackled the challenges of budget stability by adopting a federal approach, but it has preferred to take the path of "centralizing the design, implementation, supervision and control of stability, setting targets unilaterally with no room for negotiation and introducing coercive instruments". As for the causes, he notes various hypotheses, including the preference of the voters of the party in government to recentralize and a general distrust of Spain’s Autonomous Communities.

In his article, the legal expert and director of the Institut d’Estudis Autonòmics (Generalitat de Catalunya), Carles Viver Pi-Sunyer, goes further and states that "the measures taken in recent months, above all in the field of regional funding, are an unmistakable sign that the type of autonomous government in operation and the structural elements of the State of the Autonomies are beginning to be undermined". According to Viver, "what we are witnessing is the almost complete emptying of the financial coffers of the Autonomous Communities, especially of those, like Catalonia, which have had to fall back on the Liquidity Fund". Among the measures of recentralization, the director of the Institut d’Estudis Autonòmics cites those of deficit control negotiated before the EU, the 2011 reform of the Constitution, and the distribution of the deficit between levels of government. He also claims that "the process of recentralization is in full motion and all the signs are that in the immediate future this tendency is set to increase significantly".

In the editors’ introduction to the report, coordinators Núria Bosch and Albert Solé-Ollé admit that, "while the centralization of fiscal authority may be necessary in exceptional times, it is not desirable that such a system becomes consolidated and ends up destroying any shadow of regional financial autonomy". They also warn of "the need to avoid opportunistic and hasty measures of recentralization based on fluctuations in public opinion and misdiagnoses of the situation." 

Providing an international perspective, Jorge Martínez Vázquez (Georgia State University) reports that "there are strong reasons for worrying about the negative impact the crisis might have on decentralization and sub-national governance, at least, in those countries that have been hit hardest by the crisis”. According to Martínez Vázquez, episodes of crisis tend to lead to recentralizing measures for many reasons: "from political opportunism – daring to implement policies that in normal circumstances would have enjoyed much less acceptance, to the use by central governments of the fiscal policy as a tool for stabilization". In his article, he lists several countries that have also introduced measures of recentralization, including Denmark, Greece, the UK, and Norway.
Decentralization and crisis
The IEB’s IV Fiscal Federalism Report also seeks to answer the question as to whether decentralization has had a negative effect on the way in which the recession has evolved and on attempts to find a way out of it. The coordinators of the report, Núria Bosch and Albert Solé-Ollé, conclude in their introduction that "the dysfunctions of sub-central governments which have emerged in the wake of the crisis should not make us forget the advantages of a decentralized system". According to Bosch and Solé-Ollé, there is no truth in the claim that all forms of decentralization hinder macroeconomic and budget management, but in the Spanish case there are certain characteristics that might aggravate the problem:
-The exclusive decentralization of expenditure but not that of revenue hinders budget discipline
-For years, the Autonomous Communities being able to finance public expenditure with extraordinary revenue derived from construction activity
-Budget transparency and control of the accounts at the level of the Autonomous Communities have been far from perfect
The two authors conclude that the government should seek to design a system that is "more flexible and respectful of the autonomies once the storm has blown over".
In the report’s analysis of the Spanish case, it is concluded that the Autonomous Communities have had to adjust to the deficit (or otherwise) in accordance with the evolution in GDP, the degree of fiscal autonomy enjoyed and the intensity of the reduction in their expenditure and revenue. This conclusion is drawn by Julio López Laborda and Andrés Leal (Public Economics Research Group) in their analysis of the evolution of income and expenses between 2007 and 2011, in which they conclude that the Autonomous Communities reacted late to the crisis. "Non-financial income proved itself to be weak in 2008, but there was no corresponding reaction in spending until 2010." As a result, the debt of all the Autonomous Communities rose from 5.8% of GDP in 2007 to 13.3% by the end of 2011. In their analysis, the authors find that the communities with the greatest tax autonomy have suffered a greater decline in their non-financial income. "Between 2007 and 2011, regional tax revenues – and, in particular, the so-called ceded taxes – have performed worse than transfers".

Appraisal of local government reform
Among the measures of recentralization cited in the report, the proposals for local government stand out. Public Finance Professors Núria Bosch y Albert Solé (IEB-UB) consider them "an attack on local autonomy". They claim that the proposals are vague and centre on issues of secondary importance, thus avoiding a consideration of the most important issues, such as municipal size. In their article, they conclude that "these reforms will contribute little to improving the functioning of local government ":

Delimitation of powers
The article considers it necessary to clarify government powers, but casts doubts on the effectiveness of some of the changes proposed: “the measures devolve power to the Autonomous Communities without considering the funding of the municipalities at all”.
Organisational rationalisation
The study warns that, as far as most services are concerned, the costs per user or inhabitant are high due to low population densities and the existence of many small nuclei of population. Hence, “the transfer of these services to the Provincial Councils will not necessarily reduce costs”.
Financial control
According to the authors, the government’s proposals to increase financial control and to change the status of the municipal auditor are very unclear: "If, as it seems, the approval of the auditor’s appointment, salary and dismissal continues to depend on local politicians, then nothing really changes. Neither is the problem going to be solved, if new civil service examinations are not called”.
Professionalization of management
The article considers it reasonable to set certain upper limits on politicians’ pay, but claims that this is no guarantee of any savings. It also warns that the reduction in the number of paid councillors will have a very limited impact, since very few actually receive a salary.

In their article, Núria Bosch and Albert Solé also make seven recommendations for local government reform:
1. Reduction in the number of municipalities: the need for municipal mergers to achieve a minimum size of 5,000 inhabitants and, where possible, to achieve a size of 10,000.
2. Clarification of powers: delimitation of minimum municipal powers. Explicit delegation, with prior funding agreements, of other powers if municipalities achieve a minimum size of 10,000 inhabitants.
3. Financial control: improving the financial and human resource endowment of the Court of Audit (Tribunal de Cuentas) and the non-partisan election of its members. An auditor that is independent of local political power. Mechanisms of financial transparency and citizen participation in the preparation and control of budgets.
4. Accountability: direct election of the mayor. Election of district councillors to ensure the adequate representation of the merged units. The number of councillors should be linked to the size of the population and at the same time guarantee the representation of each district.
5. Professionalization: all municipalities to have an auditor and secretary. The secretary should be responsible for ensuring the recruitment of municipal staff and safeguarding the objectivity of procedures. Wage caps could be placed on the salaries of various posts.
6. Limitation of the role of the Provincial Councils: reduction in the powers of the Provincial Councils to include just those essential for the coordination of municipal policies. Change in the system for electing provincial representatives. Setting up of a mayors’ council on which all municipalities would be represented. Alternatively: elimination of the Provincial Councils.
7. Financing: larger municipalities would permit the reform of the municipal finance system and give the municipalities greater autonomy in terms of their revenues. The weight in the percentage share of major taxes could be increased (to date, limited to municipalities with more than 75,000 inhabitants) and a local surcharge might even be levied on income tax.
The IEB’s IV Fiscal Federalism Report seeks to provide information about Spain’s model of fiscal decentralization and the economic crisis and to encourage further debate on the subject. Download the Report