The financing agreement and the fiscal deficit

Last Tuesday, President Illa, interviewed on TV3, commented on the regional financing agreement reached between the central government and ERC in the following terms: "Is it a good agreement for Catalonia? No, it's excellent!"

However, five days earlier, ARA readers had been able to read Albert Carreras had a very different opinion"To what extent can the new regional financing model reduce the fiscal deficit? Some authors have already explained it: the increase in state spending is paid for, in Catalonia, as a percentage corresponding to Catalonia's GDP as a percentage of the total national GDP (18.8% according to the latest data). The reduction in the fiscal deficit will be just over 700 million euros."

Who is right? To answer this question we can use the metric proposed by Carreras: the fiscal deficit.

This deficit has been measured on many occasions, and in all of them the relevant metric—monetary flow—has yielded a result very close to 8% of Catalan GDP. International comparisons—and in particular the cases of Canada and Germany—have led to a certain consensus among Catalan analysts that the difference between Catalan GDP per capita and the Spanish average would only justify a deficit of 4%, or half.

This excessive fiscal deficit occurs through two avenues: the underfunding of the Generalitat and the lack of state investment in Catalonia. Roughly speakingBoth paths are of a similar magnitude, which is to say that the Catalan government should improve its funding by the equivalent of 2% of Catalan GDP and that the Spanish State should increase its investments in Catalonia by the equivalent of 2% of Catalan GDP as well. Both of these should be done year after year.

Where should these resources come from? From the taxes that Catalans are already paying to the State through personal income tax, VAT, corporate taxes, special taxes, etc.

In the current system, the central government retains 50% of personal income tax (IRPF) and VAT revenue, all corporate tax revenue, and 42% of taxes on tobacco, alcohol, and hydrocarbons, among others, allocating the remainder to the autonomous communities. The proposal would increase the communities' share by an additional 5% of IRPF and 6.5% of VAT, representing approximately €17 billion in 2027. It also modifies the complex criteria for distributing the resulting amount among the different autonomous communities, with the outcome being that Catalonia would receive €4.7 billion more than before. In short, of the taxes we Catalans are paying, €4.7 billion more would go to the Generalitat (the Catalan government) than before.

We stated above that correcting the excessive fiscal deficit would require improving financing by the equivalent of 2% of Catalonia's GDP; and what is that 2%? Approximately €6 billion. Therefore, the new model corrects three-quarters of the portion of the excessive deficit that corresponds to it. It is less than necessary, but there is no doubt that Isla is more correct than Carreras.

And why doesn't Carreras see it that way? Implicitly, Carreras is assuming that to finance the new agreement the State will have to increase the tax burden on Spaniards, and that Catalans will end up paying €4 billion more than before, but this assumption has no basis whatsoever.

Regarding the other half of the excessive deficit, a parallel agreement—whose implementation now appears to be accelerating—provides for the creation of a consortium so that the Catalan government can participate in the execution of state investments in Catalonia. The aim is simply to prevent budgeted investments from being only partially implemented year after year, thus allowing the remaining 2% of the excessive deficit to be addressed.

My interpretation of the agreements is therefore positive, but the following must be taken into account:

First, the fact that transforming the agreement into law will require negotiation with other parties, and that, therefore, the parliamentary process could distort it. This already happened with the previous agreement.

Second, the failure to implement state investments in Catalonia is very often due to objective difficulties with the territory—much more complex than that of Madrid or Aragon, for example—and our doubts about how to address them. This is happening with the airport and the B-40 highway, it happened with the Panadella project, and it will happen with the electrical interconnections with Aragon and France.

Finally, our economic problems go beyond the fiscal deficit. It is true that the Basque economy—which has no deficit—is doing much better than the Catalan economy, but it is also true that the Andorran economy—which also has no deficit but shares our model of mass tourism and immigration—is doing worse than ours.