04 de setembre 2007

The viability of an independent Catalan State (III)

This is the third part of the article by Josep Desquens.

The fiscal imbalance between Spain and Catalonia

The long history of Spanish centralism has resulted in Catalans, as opposed to other regions of Spain, traditionally valuing private initiative rather than the state in order to develop. This has led to Catalonia being a relatively rich and dynamic region within Spain, a country that is relatively poor by E.U. standards. Catalonia has a strong net of small and medium businesses and many micro-entrepreneurs. Containing about 16 percent of Spain's population, it provides about 20 percent of its GDP and one-third of the total industrial production and exports. The region contributes about 25 percent of Spain's total taxes, but public investment in Catalonia is scarce when related to either population or GDP contribution. The regionalized investment of the Spanish state in Catalonia from 1982 to 1998 represented only about 8.5 percent of the total.

Spain's central government controls tax collection and decides the distribution of the fiscal revenues throughout the country. So Catalans pay taxes to Madrid in exchange for public expenditure in the region. The difference between what is paid by the region and what is received back in the form of public spending is the fiscal balance, which can be positive (a 'fiscal surplus' for Catalonia) or negative (a 'fiscal deficit' for Catalonia). Calculating the fiscal balance is not an easy task. There are technical difficulties: Many public services that benefit Catalan citizens are not provided directly in Catalonia but from Madrid (e.g. army, ministries) and so valuing this is complicated. As well, the Spanish central government appears not to make available all necessary data, although it is in theory obliged to do so according to a resolution from the Spanish Parliament. However a number of studies in recent years have estimated the Catalan fiscal balance with Spain, showing not only a deficit (i.e. pays more than it receives back) but one of the highest of any region in the European Union. I refer to this situation as the fiscal imbalance.

These studies estimate the Catalan fiscal imbalance with Spain to be between 7.5 percent and 10 percent of the Catalan GDP i.e. for every 100 euros of income created yearly in Catalonia, between 7.5 and ten never return. In absolute terms, the deficit is between about 6.7 billion and about 9 billion euros or around 1,240 euros annually per capita (using the median of the estimates, 7.9 billion euros).

This is a highly abnormal situation when comparing Catalonia to similar regions in other E.U countries. First, if we compare it to regions that have similar levels of per capita GDP, we find that it has by far the largest fiscal imbalance among its E.U. peers. Nine out of fourteen comparable regions - e.g. Aquitaine in France; Scotland in the United Kingdom; Umbria in Italy; and the Southern region in Sweden - enjoy fiscal surpluses in their respective states. In those carrying a fiscal imbalance (e.g. Lisboa-Vale do Tajo in Portugal), it is nowhere higher than 3 percent. A second useful exercise is to compare Catalonia to regions whose income per capita is approximately 20 percent higher than the average of their respective state, as is Catalonia's. These areas include Ile-de-France, Bavaria, Baden-Württemberg, South East England, Stockholm, Emilia-Romagna and Lombardy. In this case, only the two Italian regions have a comparable fiscal imbalance - a situation that has created an unprecedented political uproar, mainly articulated through the Lega Nord political party, which is resulting in the reorganization of the Italian Republic through the process of so-called devolution.

The fiscal imbalance has been sustainable in the past because of Spain's relatively closed economy. However, it is not sustainable in the context of globalization. Catalonia will never be globally competitive if it has to carry such a heavy fiscal burden. Catalan companies pay high taxes, only to receive few public services and low infrastructure investment. High taxes result in making the region less competitive, the low level of investment in infrastructure lowers productivity. Not only does it hamper economic growth and the modernization of the Catalan economy, but it also impoverishes Catalan citizens and damages their social and territorial cohesion. As Columbia University professor Xavier Sala-i-Martín puts it: the fiscal imbalance is "the major challenge facing the Catalan economy for its development in the next 25 years."

Sala-i-Martín has shown that if the Catalan fiscal imbalance had been reduced by one-third over the last 25 years, assuming that the freed funds had been fully invested in infrastructure and education (leading to a higher growth rate), Catalonia would now be a frontrunner in Europe in per capita income - second only to Hamburg, London and Luxembourg. These are missed opportunities. Today, the independence question aside, the unfair fiscal treatment remains an enormous problem for Catalonia. As such it needs to be addressed in an open and informed way. Unfortunately, this is not happening. On the one hand, many people seem to have lost their sense of reality after so many years of permanent centralism. On the other hand, many politicians and commentators fear openly talking about an issue that has become 'politically incorrect' in Spain. They do not want to be compared with the Italian right-wing xenophobic Lega Nord, which has used such type of arguments in a highly demagogical manner.

In any case, one thing is clear: the fiscal imbalance is a key argument supporting secession. A fully independent Catalonia would not have to pay taxes to Madrid that are invested elsewhere. Instead, it could invest them to the benefit of Catalonia.

What solidarity?

The central argument supporting the past and present fiscal imbalance is a so-called inter-regional solidarity. There are also other less convincing arguments such as the populist claim that Catalonia has a historical debt to the rest of Spain, or the economically mistaken opinion that such a fiscal imbalance is necessary as a means to finance Catalonia's large trade surplus with the rest of Spain. Let us focus on solidarity. The current inter-regional solidarity system has major structural flaws that have to be recognized. First and foremost, no solidarity system can compromise the economic health of the 'donor,' as the current one is doing. Second, the current system was designed when disparities between Spanish regions were much higher. Now, after 20 years in the European Union, this has changed significantly. Indeed, in comparing Spain to other E.U. countries we see that the regional differences in Spain are not as abysmal as claimed. Countries such as Germany, France, the United Kingdom and Italy have more substantial inter-regional disparities. Third, supporters of the status quo ignore that Catalonia, though rich, has one of the highest rates of intra-regional income disparity in Spain, both territorially and socially. These disparities are not tackled effectively under the current system.

In this respect, it is important to highlight that if Catalonia were an independent state within the European Union, roughly half of its territory would be designated as a preferential area for E.U. structural funds. Catalonia is currently considered as a single unitary entity by the European Union and thus, given its overall level of income, is not eligible for these funds. It is in this predicament that significant parts of Catalonia that require public investment do not receive public aid neither from Madrid nor from Brussels.

Sala-i-Martín has referred to an interesting example that illustrates well the character of the present Spanish solidarity system. In 2000, the GDP per person in Catalonia was 21.9 percent higher than the Spanish average. In comparison, the GDP per person of the Autonomous Community of Castilla y León was 7.6 percent lower than the Spanish average. On the basis of this income differential, one could argue that there is a need for some kind of inter-regional transfer. The surprise comes when we assess the extent of these transfers: Catalonia's Income per capita (after redistributions) was 4.3 percent higher than Spain's average, while Castilla y León's was 9 percent higher. In other words, despite producing over 30 percent more, the redistribution system results in Catalans ending up with a lower income per capita than Castilian-Leonese people. This supports the argument that the Spanish inter-regional transfer system is neither fair nor economically beneficial, but creates a welfare dependency that harms entrepreneurship and growth in the poorer regions.