Regional funding: the glass half full

On Friday, the Spanish Deputy Prime Minister publicly presented the proposal for a new financing model for the autonomous communities under the common regime. Outside of Catalonia, the proposal has sparked fierce opposition from the People's Party (PP) and the Socialist president of Castilla-La Mancha, both arguing that it not only excessively favors Catalonia but also represents a break with the system of solidarity that the State is meant to guarantee, and that this is because Prime Minister Sánchez has yielded to the blackmail of the Republican Left of Catalonia (ERC). Within Catalonia, many voices—including Junts per Catalunya and the employers' association Foment—denounce the proposal, adding that it falls short of the commitments made by the Spanish Socialist Workers' Party (PSOE) and the Catalan Socialist Party (PSC) in the investiture agreements. Who is right?

It is clear that the initial criticisms are unfounded. The proposal primarily benefits Murcia and the Valencian Community, which are by far the worst-funded regions; followed by Castile-La Mancha (!), Catalonia, and Andalusia. The regions that see the least improvement are La Rioja, Cantabria, Castile and León, and Extremadura, which currently benefit from much better funding than the rest. In other words, the proposal modifies the situation in a fundamentally positive way.

One might criticize the fact that these effects are achieved through a complex and somewhat unreliable mechanism (the calculation of the adjusted population, a climate fund, etc.), but the proposal is no more (if not less) complex than the current model, and furthermore, this is not what motivates the criticism from outside Catalonia, but rather the fact that the reform benefits those it is meant to benefit. Therefore, these criticisms are not legitimate.

We now consider internal criticisms.

The legitimate and explicit aspiration of Catalan nationalism is twofold: that regional funding not be a cause of Catalonia's excessive fiscal deficit, and that the Generalitat (Catalan government) manage the taxes paid by Catalans. Although often confused, these are two distinct objectives.

The first scenario would require an improvement of €6 billion, because this is the amount by which regional funding contributes to the fiscal deficit: 2% of GDP. Interestingly, this is the amount by which the Generalitat's funding would improve if the proposal under consideration were applied to the actual population rather than the adjusted population. We would also get close if the proposal included the cost of living as a parameter. The fact is that instead of €6 billion, the proposal provides an additional €4.7 billion. Legitimately, some may see this as insufficient, while others may see it as a significant improvement; I count myself among the latter.

As for the second objective – the comprehensive management of taxes by the Generalitat – it is part of the agreements between the PSC and ERC for the investiture of Salvador Illa, but it was explicitly recognized that this assumption of functions should be "progressive", and it was not part of the five agreements whose execution should be immediate: "substantial" improvement of non-homogeneous powers and the consortium to manage State investments in Catalonia.

As in the previous case, here too we find a situation that may or may not be considered insufficient. Undoubtedly, the proposal does not stipulate that the Generalitat will fully manage Catalan taxes, but it does take three steps in this direction. First, the Generalitat will be able to participate in the collection of Personal Income Tax (IRPF) starting in 2026, an essential step to gradually acquire the resources and experience necessary to eventually replace the Spanish Tax Agency (AEAT). Second, the Generalitat will be able to participate in a single fund where tax revenue will be deposited, thus automatically granting it access to the corresponding funds (as if it had collected them itself). Third, the Generalitat may choose to finance its non-homogeneous responsibilities through a percentage of VAT revenue (as would be the case if its funding were through a special tax arrangement).

In short, it's true that the proposal modifies the ordinary financing system, but it also allows the autonomous communities to choose to evolve towards a system of special tax arrangements, and it's obvious that these options are being created to accommodate the objectives of Catalan nationalist parties. The impatient have reason to be dissatisfied because the ultimate goal isn't established, while the patient can be satisfied knowing that the final objective is still a long way off (it will take the Catalan government more than a decade to build something similar to the Spanish Tax Agency) and that the important thing is to be able to take the first steps. In this case, too, I count myself among the latter.