Madrid, the Balearic Islands, Catalonia and Valencia were the communities most disadvantaged by the current autonomous financing system, based on the latest data available for the year 2018. Broadly speaking, the same pattern has recurred since the current model began to be applied in 2009.
This is reflected again in the fifth update of the Autonomous Financing Map, published by the Barcelona Institute of Economics (IEB). This tool shows the evolution of the available resources per capita of each territory as the equalisation mechanisms and adjustment funds of the model are applied. In 2018, the Community of Madrid had average tax revenues of 3,482 euros per inhabitant but, once the funds of the model were applied, it ended up receiving an average of 2,631 euros.
In the case of the Balearic Islands, the application of all funds in the model resulted in a 15.5% reduction in tax revenue per capita. In 2018, the Balearic community generated an average of 3,185 euros in tax revenues per inhabitant, which was reduced to 2,691 euros.
Catalonia generated, on average, total revenues of 2,967 euros per inhabitant in 2018, which ended at 2,664 euros after the system’s equalisation mechanisms and adjustment funds were applied.
These figures indicate, among other things, that inhabitants of these three autonomous communities received, on average, 17% less than their contribution to the State.
Another telling example of the arbitrariness of the final available resources resulting from the current funding system has been the uneven situation in which communities end up with a somewhat similar level of tax resources as before the implementation of the equalisation and adjustment funds. For example, the Community of Valencia, which starts at 2,369 euros per inhabitant, ends up with 2,494 euros after the system was implemented, while Galicia, with lower starting funds of 2,210 euros per citizen, ends up getting more, receiving 2,937 euros after the adjustments from the model.
The Financing Map provided by the IEB shows that some of the territories with more fiscal capacity per capita end up with a level of resources lower than the average. On the one hand, it is evident that the mechanism of equalisation, known as the fundamental public services guarantee fund, correctly meets the goal of closing the gap between communities with greater and lower fiscal capacity, without altering the initial order. However, the implementation of the adequacy adjustment, competitiveness and cooperation funds creates distortions in the distribution. This would justify a “model review,” according to IEB researchers. But it is a review that may seem difficult to address immediately because of the current circumstances with the pandemic, but which, according to experts “should not de delayed, as it affects the capacity of different administrations to respond to the crisis”
In line with this, one of the suggestions would be “to make a partial move forward and reach consensus on the more technical aspects”. Some of the aspects identified by IEB researchers would be, for example, “to adapt the calculation of on-account payments to the current economic reality and not, as had been the case, according to future forecasts.” Another topic to be addressed would be “to adjust withholdings in the IRPF to the effective autonomous rate, essentially having two deductions, one for the part paid to the state and another for the autonomous community in order to better estimate the fiscal responsibility of the communities relative to this tax and to apply deductions closer to the final rate to be paid.” But beyond these measures, it is clear that in the medium term “a coordinated reform that implies a huge consensus will have to be addressed.”
According to IEB experts, one of the keys to this reform will be the review of the existing equalisation mechanism, the FGSPF: “while it has been a step forward from the previous model, it can still be improved in some respects. Fundamentally, those that pertain to the degree of equalisation achieved and those relating to variables used as indicators of fiscal needs and capacity, as well as the mechanisms for updating and monitoring”.
Extremadura, Castilla-La Mancha and Galicia, the communities that benefit the most
Among the communities benefiting the most is Extremadura which, despite generating a lower level of tax revenues than the state average, ended up with a level of resources per capita well above this average, thanks to the current financing system. Concretely, the community of Extremadura initially had annual tax revenues of 1,770 euros per capita on average, which then rose to 3,089 euros once the model’s funds were applied. This is a gap representing more than 43 points (when referencing averages to an index with a base value of 100) between what is collected and what is finally obtained.
Behind Extremadura are Castille-La Mancha and Galicia. Castille-La Macha obtained an average of 2,775 euros per capita, with an average increase in available resources of 36%, and Galicia, an average of 2,937 euros per capita, with an average increase of 33%. Thus, the resulting favourable difference for both communities was about 20 points.
Leaving aside the differences between the tax revenues obtained and the resources allocated, the three communities that received the most resources were, in this order, Cantabria, La Rioja and Extremadura.
Evaluation and updated analysis of the model
The latest edition of the IEB’s Autonomous Community Financing Map includes the consolidation of a tool that provides a system of evaluation and updated analysis of the current model of autonomous community financing, having been in operation since 2009. Through the different sections of the website, the user can gain knowledge of the entire tax collection norms ceded by the central government to each autonomous community, the resources that result from their participation in the equalisation mechanism (guarantee fund of basic public services) and from the model adjustment funds (sufficiency fund, competitiveness fund and cooperation Fund).
The tool allows us to visualize the four situations that have occurred.
The autonomous communities that were below average in tax revenues per capita then rose above the average once all the funds of the model were implemented: Extremadura, Castille and Leon, Asturias, Galicia and Castille-La Mancha.
The communities that were below average in tax revenues per capita and continued to be below the average after all the funds of the model were implemented: Andalusia, Murcia and Valencia. However, even as they were positioned below the average, all of them showed an improvement from the initial level except Valencia, which even moved further away from the average (from 96 to 95).
The communities which were already above the average in per capita tax revenues, and still moved further up once all the funds of the model were applied: Cantabria, La Rioja, and Aragon.
The autonomous communities that were initially well above the average in per capita tax revenues but experienced large reductions once all the funds of the model were applied: Madrid, the Balearic Islands and Catalonia.