Regional financing: at least €18 billion at stake

BarcelonaRegional financing is the biggest outstanding issue. The 2009 model, which should have been reformed or updated more than a decade ago in 2014, is the major challenge that ERC and the PSOE are working on behind the scenes. They are trying to ignore the political noise surrounding corruption cases. and lay the groundwork for the new financing in the bilateral commission between the State and the Generalitat (Catalan Government) that will meet on Monday in Barcelona, headed by the Minister of Territorial Policy, Ángel Víctor Torres; and on behalf of the Government, by the Minister of the Presidency, Albert Dalmau; and the Minister of Economy, Alicia Romero. At stake are approximately €18 billion for all the autonomous regions of the common regime, a figure sufficient to at least update the figure incorporated into the 2009 model (approximately €12.5 billion), according to calculations by sources with access to the negotiations.

Aside from the principles or foundations of the new model, from which the term "singular" disappears, few other details will emerge after the meeting. The possibility of a formula for Catalonia has shifted to a "generalizable" model with a "strong singular emphasis," which would reflect the differentiating factors of the territories, according to the sources consulted. And it will be based on revenue rather than expenditure. The meeting will establish the general principles, without going into the fine print, which will require intense negotiations, according to the sources consulted.

Catalonia and Madrid

The issue is that nearly half of the amount owed by the State would correspond to the autonomous communities of Catalonia and Madrid, although the latter benefits from being the capital. For this reason, some experts advocate setting a limit on their allocation, that is, establishing a leveling system that would reduce the differential of more than 30 points currently in favor of Madrid. The remaining resources would go to the other thirteen autonomous communities of the common system, although with special attention to the Valencian Country, the autonomous region most affected by underfunding. Without a substantial improvement in this region, it will be difficult to obtain the support of forces like Compromís, according to the same sources.

The State contribution must be updated to guarantee a system in which the principle of ordinality is respected. That is, to ensure that the per capita income of the autonomous communities does not decline as a result of applying the leveling mechanisms between autonomous regions. According to the latest 2022 settlement data—the final settlement is due two years later—Catalonia ranked third in tax contributions, but dropped to 10th in euros per capita (14th if the price differential is taken into account) once the distribution between territories in the form of spending and investment was made. The 2023 settlement has not yet been released.

This is due to a two-phased implementation of the current model: a first that respects ordinality; and a second with different, highly opaque funds that substantially unbalance what some communities receive compared to what they contribute. Ahead of Catalonia, the other most affected are Madrid and the Balearic Islands. One of the essential objectives pursued by the reform is to achieve a transparent model with a tax basket focused on personal income tax.

Revenue per capita

The Generalitat, according to data from last year, when the ERC party was still in power, emphasized that the financing model, which expired in 2014, "places Catalonia at the bottom of the list of autonomous communities under the common system in terms of revenue received per capita." And this is a result that has been repeated every year since 2010. In fact, only in 2009, the first year of application of the current model, did it place Catalonia above the average. The state's contribution doesn't need to be made all at once. In the 2009 system, it was made over two years, according to the sources consulted. This is a way to facilitate its implementation.

In addition to the ordinality, two other bases that should be established at Monday's meeting are a level of solidarity and the tax basket. A key element is to eliminate the advance payment system, which leaves payment at the discretion of the State and results in settlements being made two years late. Under the new formula, the autonomous regions would collect and—including Catalonia—transfer to the State the cost of centralized services and solidarity with other territories, points that remain to be defined.

The goal is to collect all taxes. But all efforts are focused on personal income tax, and in theory, according to the investiture agreement, the Catalan Tax Agency should begin collecting it next year. Income tax is the most stable tax in the face of volatility and sensitivity to economic cycles, compared to other taxes such as VAT. The other major objective, in any case, would be to control VAT collection from SMEs, since Catalonia accounts for 25% of its revenue, according to the sources consulted. However, there is no definitive agreement on this point.

In any case, personal income tax will be a complicated issue that must be defined through a master plan developed by the company Indra. Currently, the autonomous communities receive half of the tax in advance (€13 billion in Catalonia), and the final settlement is made two years later. According to the sources consulted, at least 80% could now be deposited and the remainder received as a transfer, but without the current delay. In any case, these are issues to be defined and will require some modification to the Organic Law on the Financing of the Autonomous Communities (Lofca), to Law 22/2009 on the Financing of Autonomous Communities under the Common Regime, to include, for example, personal income tax among the taxes delegated by the State, and to Law 16/2010.

Another important element concerns the financing of non-homogeneous powers, that is, those that Catalonia has that other regions do not, such as the Mossos d'Esquadra (Catalan police) and prisons. Instead of being the subject of periodic negotiations, they should be included in the system with a provision for updating, according to the sources consulted.

Negotiators hope to make progress on a "discreet, but real" bilateral relationship between the State and the Generalitat, according to sources familiar with the process. The overly ostentatious relationship between the two administrations has angered other autonomous regions.