Regional funding: we are not going towards ordinality but towards equality

In the last two weeks, a number of opinions have been published regarding the regional financing proposal agreed upon by ERC and PSOE. Many of these opinions have referred to the principle of ordinality, and I believe a clarification is in order.

The financing system for the autonomous communities under the common regime is fundamentally composed of two distribution operations. The first consists of dividing the resources collected by the State: a portion is retained by the State to cover its responsibilities (defense, public order, senior management, infrastructure "of general interest", non-contributory pensions, etc.) and another portion is allocated to the autonomous communities to cover their respective responsibilities (healthcare, education, social services, etc.). The proposal would entail reducing the first proportion in favor of the second by an amount of €21 billion, allocating a larger share of the revenue from major taxes to the autonomous communities (from 50% to 55% of personal income tax, from 50% to 56.5% of VAT, etc.). It has often been said that this €21 billion is "new" or "additional"; it would be more accurate to say that it is reallocated.

The second step involves dividing this second amount among the 15 autonomous communities. There are two principles that could govern this second division and that everyone would understand: equality and ordinality. The first consists of dividing the total by the population—adjusted or not based on corrective factors—and allocating to each community the amount it is entitled to according to its population. The second principle—ordinality—establishes that, to incentivize economic dynamism, there should be differences, but these should reflect contributions: the autonomous communities that have contributed more taxes—because they have higher incomes—should have more resources to dedicate to financing their own public services; that is, if a community has contributed more per capita, it cannot receive less, also per capita.

The problem is that today the very large differences don't correspond to any reasonable criteria, and certainly not to actual contributions. In the words of one expert, they seem like the result of a lottery, and, in fact, they are the result of applying complicated mechanisms that are more arbitrary than fair.

The distribution agreed upon by the PSOE and ERC is not much more rational—though it is simpler—than the current one. Essentially, it maintains the current order: Cantabria remains the best-funded and Valencia the worst, but it does significantly reduce the disparities. Those regions that would see the smallest improvement in their funding would be those currently receiving the most (Cantabria, Asturias, Aragon, etc.), while those that would see the greatest improvement would be those currently receiving the least (in the future). It is true that there are some modifications to the order, but these changes are only significant when measured in terms of "adjusted population," which is a very inconsistent metric. In terms of per capita funding, the order is similar to the current one (although Catalonia would see a slight improvement).

In short, although the principle of ordinality was agreed upon between ERC and PSC in Salvador Illa's investiture pact, the proposal actually focuses much more on equality than on ordinality. And it must be said that the progress made in this direction is significant: if now, for every €4 that Cantabria receives, Valencia only receives €3 (to finance the same services!), now it would receive €3.3 (and Catalonia €3.5).

The fact that we are moving towards equality rather than ordinality doesn't seem worrying to me. Firstly, because equality seems acceptable to me (in fact, the German system is essentially egalitarian), and secondly, because it is simply an extreme case of ordinality: if everyone receives the same, no one can claim that by contributing more, they receive less.

Since equality is a reasonable principle, I believe it will ultimately prevail; that is, I wouldn't be surprised if, within a maximum of two reforms to the system, all autonomous communities end up receiving the same per capita resources (to finance the same services) as Cantabria (we in Catalonia would certainly sign up for this outcome!). Once we reach this point, I think it will be impossible to introduce differences so that those of us who have contributed the most (Madrid, the Balearic Islands, Catalonia) receive more. Equality, therefore, seems to me to be an inherent part of the system's reforms.

Another issue is the management of taxes, which was the real sticking point of the unique financing proposed by ERC, and an area where the proposal we now have on the table only shows modest progress.