Public Finance
Business 31/01/2022

Generalitat rejects first proposal to change financing model

Catalan government demands real population be weighted and the distribution of taxes be addressed

4 min
The Minister of Economy, Jaume Giró, at the Parliament's hemicycle

MadridThe Spanish Ministry of Finance's proposal for the "adjusted population" which will rule the regional financing model got a frosty reception from the Generalitat. The Catalan Government not only considers that the adjusted population criterion "does not adjust to the reality of Catalonia", but also that the Treasury's approach does not include elements that the Generalitat defends as essential, such as the cost of living. Almost two months later, the Generalitat has let the central government know what it thinks, although it starts from the premise that no model "can fix the underfinancing and the deficit towards Catalonia".

The regions have until this Monday to send their opinion on the Spanish government's proposal, which was sent at the beginning of December. ARA has learnt that this Sunday the responses from Madrid, Aragon and Catalonia were already on the table. In the Catalan case, it is a ten-page text to which this newspaper has had access and which the Catalan Government begins by claiming that implementing the reform by touching the concept of adjusted population is to put the cart before the horse. "It would have to be considered as a last resort," the text states.

CAccording to the According to the Catalan Department of Economy, which specifies that it is not in a negotiation phase, it would first have to solve the "vertical imbalance" that it claims has occurred under the current funding model (in force since 2009 and pending renewal since 2014) and see if over the years the money regional governments ended up receiving has been reduced. Then, address the set of regional taxes (50% of personal income tax, 50% of VAT and 58% of excise taxes) which, together with resources provided by the State, nourish part of the regional funding system and "decide whether they should be modified". It also points to the need to "increase regional governments' regulatory capacity on tax figures", that is to say, that the they have more fiscal autonomy. And, as a last step, it talks about the concept of adjusted population.

Why is the concept of adjusted population important? This element is one of the main pillars of the regional financing model. It is the system with which the financing resources are levelled according to criteria such as population and spending on health or education, for example. The calculation has never been free of controversy as to whether it benefits some regions more or less than others. The weighting of each criterion is decisive to know how much each regional government receives and so that all can provide public services under equal conditions.

Catalonia, however, opts for a criterion of the "real demographic weight", that is, the population, because it considers that it is "the simplest variable", according to the text, to meet financing needs. However, given the possibility that some correction may have to be introduced, the Generalitat claims that "it could be corrected by the price index differential between the communities" as a complementary measure.

Regarding changes in criteria that make up the concept of adjusted population (health, education, social services, other services and "corrective variables") proposed by the Ministry, the Generalitat highlights some of the following.

Health, education and social services

Regarding the health criterion, the Generalitat believes it is "complicated" to divide the population in 20 age groups, as proposed by the ministry, and not in seven as until now to know the subsequent cost of health services. It also believes that there is a "lack of transparency" when it comes to obtaining data on the protected population in order to know whether regions need more resources or not.

In education, the Catalan Government welcomes the possibility of extending school-age population up to 17 years of age, although it would opt for applying an age bracket to university students in order to have it more clearly defined. In addition, it is committed to taking into account "potential users" (the age group most likely to attend university) and not only enrolled students to avoid "encouraging a reduction in university fees".

As for social services, the Generalitat would like to see dependent population under the age of 65 also counted, and not only the elderly. The Government also sees the Ministry's proposal as weak when it comes to taking into account social exclusion (part of the unemployed without unemployment benefits). In this sense, the Generalitat believes that taking into account only people registered as unemployed "underestimates the weight of the population at risk of social exclusion" and proposes to take other elements into account such as households with no members holding a job.

Leaving depopulation aside

Among the corrective variables is for the first time depopulation, as had been requested by the most depopulated regions (Galicia, Asturias, the two Castilles, Extremadura and Aragon). The Generalitat believes that it is a social problem that would have to be addressed with other mechanisms "outside the financing model". Nor does it look favourably on the introduction of "fixed costs". In addition, it criticises the fact that two of the Catalan government's long-standing proposals are not introduced within the corrective variables: the level of income and the consumer price index.

As for the weight of each criterion, which the Treasury has left it fairly open to be able to negotiate, the Catalan Government believes it has "overestimated" the weight of corrective variables.

The ministry's proposal and regional governments' responses open the long road towards the reform of the financing model, on which there are many doubts. On the one hand, because most academics agree that the system is difficult to decipher due to its complexity. On the other, because of the political climate and upcoming elections. "I ask [the PP] to be open-minded in order to approve the reform", said the Minister of Finance, María Jesús Montero, this Friday, aware that its votes will be key. A change in the system requires an absolute majority in the Spanish Parliament and Basque parties (the Basque Country has its own finance model) usually abstain from the debate.