Regional Economic Disparities in Spain: Finance and Redistribution
Regional Economic Disparities in Spain
Contrasts in Regional Economic Development
The diverse natural conditions and historical and social factors of Spain’s autonomous regions have led to uneven economic development. The Spanish economy is the fifth largest in the European Union and the fourteenth largest in the world by GDP. However, there are large areas of the state with low development and a significant segment of the population with low incomes. Families in the Basque Country and Navarre have the highest income figures, while southern communities have lower levels of family income, reflecting their lower economic development.
Finances of the Autonomous Communities
There are two basic models of financing autonomous regions: the common system and the leasehold system.
The common system is the funding system used by most regions. Under this system, the regions receive two types of resources from the central state administrations:
- Tax Resources: Money from taxes given to regional administrations.
- Non-tax Resources: Money received from the state that is not dependent on taxes.
Communities can receive additional resources and can use debt, subject to certain regulatory conditions.
The leasehold system applies only to Navarre and the Basque Country, called Foral historical territories. Pursuant to the first additional provision of the Constitution, the Statute of Autonomy of the Basque Country and the Law of Reintegration and Improvement of the Foral System of Navarre established that economic relations between the state and these territories are governed by the statutory system of economic agreement. Under this system, each administration of these territories, with their legal traditions, controls, manages, and collects the bulk of state taxes and contributes to the general expenses of the state with a share of money. The basis of this fee is fixed every five years and updated annually by applying an update index.
Redistribution of State Resources
Not all regions have the same powers transferred, and the funding system should address different economic needs. Therefore, in communities under the common system, there are so-called sufficiency funds, as a mechanism for closing the financing system. Communities with few transferred powers may have a negative balance with sufficiency funds if their real needs are less than the initially calculated value.
The majority of global funding for communities under the common system comes from funds ceded by the state, which means that regions with lower economic development and wealth generation could be less disadvantaged. Therefore, the Constitution foresaw in 1978, in Article 158.2, the creation of an Inter-territorial Compensation Fund (FCI) to correct imbalances and implement the principle of solidarity. This fund was launched with the application of the Law on Financing of the Autonomous Communities (LOFCA) in 1980.
To work, the richest communities in the state should receive less money than they contribute in taxes, which is known as the fiscal deficit. This is beneficial for the poorest regions but may compromise the future development of the richest communities if the deficit represents a very high level of GDP. The territorial redistribution of resources is always difficult and is also present in Valencia and Madrid. They bear large fiscal deficits, while communities with charter arrangements, although they have a very high level of income, do not contribute to inter-territorial solidarity.