The reason for Catalonia’s debt

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. One is Castilla-la Mancha, which is the second most indebted region (35.5 per cent) in Spain, despite receiving above-average funding. The other is Madrid, whose income is lower than average, as is its debt ratio: 13.6 per cent. Both cases deserve to be looked into in greater detail, but in the case of the Madrid region, it may be partly explained by the fact that it includes the country’s capital city.

Given the size of its debt, another question which people ask is whether an independent Catalonia could cope with it, more so if it were to take over a chunk of Spain’s sovereign debt, too.

The answer is that the situation for Catalonia won’t be any worse than it is today. We mustn’t forget that Catalonia is presently in a State that is already heavily in debt. The debt of the entire Spanish public sector is equivalent to 99 per cent of the country’s GDP. The central government’s debt alone amounts to 72.9 per cent of the GDP. A portion of the latter would be transferred to the accounts of an independent Catalonia, but not of the former, as that includes the debt of other regional and local governments. Actually, Catalonia’s tax-payers are already paying off some of that debt at present. To be precise, 19.5 per cent, which is the percentage that Catalonia contribute’s to Spain’s coffers.

With independence we would have to negotiate how much of the Spanish debt we would assume. It might be proportional to our share of GDP, population, public spending by Madrid and so on. The least favourable criterion would be to base it on our share of Spain’s GDP, which stands at 18.8 per cent, but even that would be lower than our current contribution (19.5 per cent). Needless to say, the outcome would be more favourable if we took on a share the size of our population (16 per cent) or the relative weight of Madrid’s public spending in Catalonia, which hovers at around 9 per cent.

To sum up, the best way to put a stop to Catalonia’s increasing debt is for it to become an independent country. It has been clearly proven that its Treasury would provide enough resources to fund more and better quality public services than today.

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