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Experts address the members of the Senate calling for an urgent partial reform of the Spanish regional funding system

The experts agree on a regional funding model based on simplicity and transparency, with a more equitable distribution of resources and a heightened fiscal responsibility

In September 2020, the Senate held a workshop to discuss the reform of the regional funding system in Spain, organized by FEDEA and the Olof Palme International Foundation, along with Cercle d’Economia, ESADE-EcPol, Ivie, RIFDE and the University of Oviedo. The event was structured in two parts. The first focused on the areas of consensus presented by the participating experts on the changes needed in the funding model, while in the second part, alternative proposals were offered to revise some of the main aspects of the funding system.

One of the main ideas of the workshop was the need for a complete and coordinated revision of several areas of the regional funding model in Spain, including the common system for all regions and for those regions under the “foral” system, as well as for the municipalities and the rest of the local corporations. The revision aims to improve the way the various systems interact, making them more equitable and efficient.

According to the participants, the main objective of the reform is to gradually advance towards a simpler and more transparent model that citizens understand, marked by 1) a more equitable distribution of resources among all the administrations involved, guaranteeing an equal access of citizens to public services, and 2) a greater fiscal responsibility to align the incentives of public-sector agents with the interests of the citizens they represent, forcing them to consider not only the benefits, but also the cost of their actions.

Although the experts recognize that due to the COVID-19 pandemic there are other priority issues, they argue that the reform should not be put on standby, among other reasons because it also affects the crisis response capacity of the various administrations. They insist that at least a partial emergency reform should be carried out in order to advance along the lines proposed and strengthen, in particular, the resources of those regions with fewer funds.

The areas of consensus reached by the participants were explained in the first session and are detailed in the annex below. The second session discussed the degree of interregional levelling desired, the optimum distribution of tax management powers between the State and the regions and the best way to establish and guarantee the sufficiency of the different administrations. A brief list of relevant documents is included at the end of the annex, some of which clearly describe the position of the participants and the entities they represent on the issues analyzed at the workshop. Annex:

Areas of consensus reached by the participants

1) A coordinated reform of all the aspects of the regional funding system is needed to improve the joint functioning of the different administrations, including regions in the common system and “foral” regime and the different local corporations.

• The revision of the competencies of the different public administrations, distributing the funding tools accordingly.
• The adaptation of the regions under the foral funding model to the current situation of the regions, in order for the foral regions to effectively participate in the interregional levelling mechanisms, which have evolved differently to what was expected when originally regulated.

2) Although the pandemic imposes other priorities which will postpone the reform of regional funding model, it should not be put on standby, among other reasons because it also conditions the various administrations’ response to the crisis. Therefore, an urgent partial reform should be made at least to advance along the lines proposed, being especially important the injection of additional resources to regions that receive fewer funds, taking into account the effects of the crisis on the taxes they receive.

3) To advance in this reform, an agreement should be reached among the different parties. The reform must be carried out gradually, seeking to obtain and ensure equality, responsibility and transparency.

4) Equality: A more equitable distribution of resources among regions is necessary, allowing a more equal access to public services for all citizens, thus avoiding arbitrary reordering of territorial administrations in terms of their resources per adjusted inhabitant.

• At regional level, funding must be based on fiscal capacity and the degree of levelling agreed on politically.
• At municipal level, an effective levelling mechanism, which is inexistent at the moment, is needed, especially for those municipalities that are financed by the tax transfer method, or system of state transfers, which should be revised and based on need and fiscal capacity.
• Within the common regional funding system, vertical transfers should be revised, integrating the current Sufficiency and Convergence Funds into the Guarantee Fund or in a single vertical levelling fund with a distribution that is not conditioned by the status quo.
• The inequality gap in funding between the common system and the foral system should be reduced. Although the foral regional system is not under dispute, the following issues should be revised (i) the contribution of the foral regions to the interregional solidarity, to make them more equivalent to other regions with similar income levels (ii) the calculation of the quota and the contribution and adjustments to it by direct and indirect taxes, adapting it to the principles included in the Agreement and Convention laws.

5) Tax autonomy and fiscal responsibility: more fiscal autonomy should be given to the various administrations to manage their income, requiring them to take greater responsibility for financing their expenditure, in order to match the incentives of public-sector agents with the interests of the citizens they represent. If territorial administrations need additional resources to those provided by the levelling system, they must be able to obtain them, with the political cost involved in asking their citizens for them.

• At local government level, it is proposed to apply, optionally, an adjustable surcharge on personal income tax and a widening of the margins to set property tax rates, as well as an optional tourist tax on overnight stays.
• At regional level, it is proposed to give the regions the autonomy to design and manage the co-payments for public services, including health, and the creation of an autonomous section of VAT and Special Taxes, which are homogeneous throughout the country to comply with European regulations, would be set collectively by each region.

6) Simplicity and transparency: information and results should be published and easily accessible to all citizens, allowing a clear understanding of its functioning in order to evaluate its performance.

• Regarding the foral funding system, the lack of transparency is almost absolute. The details of the calculation of the quota and the contribution and adjustments must be published, including a detailed list of the State costs that are considered to be assumed and not assumed.
• In other cases, much more information is available but hardly understandable by non-experts. It should be easily accessible and at the same time understandable for the general public.

7) Gradually:  transitional periods are needed so that the effects of the reforms that imply important changes in the funding of the administrations can be produced gradually, especially when it involves a decrease in the funds received, with the focus set on achieving an equitable distribution of resources within a reasonable period of time and bringing a prompt solution to the administrations most affected by the current system.