The current model for financing Spain’s regions or “autonomous communities” (ACs), the so-called “common” regime, is the result of various agreements reached by the Spanish Fiscal and Financial Policy Council over the last 30 years. This model is structured around three channels for obtaining financial resources: a) a ‘tax mix’; b) an equalization mechanism; and c) three adjustment funds (for further details, see Bassols et al., 2010).

If Spain wants to achieve a level of fiscal pressure similar to that of the EU-15 mean, we would have to collect about 75,000 million euros more in tax (recall that personal income tax revenues stand at approximately 82,000 million euros).Drawing on figures reported by Schneider and Buehn (2012), this means that if our shadow economy did not exist (the naïve scenario) – and without there being any need to increase the nominal tax burden, we would reach the same levels of fiscal pressure as those of our EU partners and, therefore, the same ratios of public expenditure to GDP1. Alternatively, with a shadow economy similar in size to that of Austria or Luxembourg (the highly optimistic scenario), we would reach 57% of that level, while achieving a shadow economy similar to that of our nearest partners (the optimistic scenario), we would reach 31%.

Once again the Spanish tax system finds itself immersed in a process of fiscal reform.This summer the Government has introduced three bills1 that seek to “address a comprehensive reform of our tax system as it currently stands”, as stated in the preamble to the first of these bills. In the current economic situation, the Government considers it a priority “to revise our tax system so as to improve the efficiency of resource allocation and tax neutrality, thus stimulating economic growth and job creation”, as well as ensuring financial sufficiency for all levels of public administration. Consequently, the current tax reform would seem to be characterized by attempts to make the tax system more efficient, with the goal of promoting growth in the economy and tackling the job shortage, without overlooking of course the primary objective of fiscal consolidation. In short, improving efficiency and guaranteeing sufficiency are the two main objectives of the reform.

The fiscal balance is the difference between a central government’s tax revenues and its spending in a particular territory. It may be negative (a de cit) or positive (a surplus). The balance resulting from the calculation indicates the degree of territorial redistribution of the central government’s budget.

That demographic ageing can have a negative impact on the long- term financial sustainability of pension systems is far from a new issue in the political and economic forums of debate in developed countries. Since the end of the 1980s, various international organizations (the World Bank, OECD and UN, among others) began to raise the alarm about this problem.They subsequently proposed a series of reforms with the aim of providing greater financial sustainability for the pension systems then under threat from an ageing population. For example, over more than 20 years ago, OECD experts spoke as follows about this problem:

Lawrence Summers, former Secretary of the U.S. Treasury and Professor of Economics at Harvard, has drawn parallels between the evolution of the tax system and the family garage.When the family moves to a new house, the garage is quite uncluttered and the family cars t easily. Over the years, the family begins to use the garage to store more and more junk. Until the day arrives when it is dif cult to park the cars in the garage because of all the accumulated clutter and, so, the family decides to get rid of everything they no longer need by organizing a garage sale. A fundamental tax reform has a lot in common with these garage sales.Although Spanish homes and garages are very different, and there is no tradition of holding yard sales to get rid of useless junk, we believe that this comparison is highly illustrative of what is happening to the Spanish tax system.The system needs to be completely overhauled. In this regard, Spain is no different.