The Balearic Islands and the new proposal for regional financing
The recent proposal for regional financing does not change the current model, although it increases resources for the Balearic Islands; experts warn, however, of the risk that the adjusted population will negatively impact future revenues.
In this text, I briefly summarize a general consideration of how the proposed new regional financing affects the Balearic Islands. Despite the criticisms from various quarters, the proposal presented, as it is known, strictly speaking, does not constitute a new financing system. It is not unique to Catalonia, although it does benefit from it to a certain extent (but not only Catalonia: Andalusia, Murcia, and the Valencian Community also benefit). It does not remove Catalonia from the common regime nor place it under the Economic Agreement. It is not a faithful reflection of the investiture agreement, which has been so often discussed as separatist blackmail. It is not a fiscal pact. It does not commit to the desired ordinality. It is not a model based on the fiscal capacities of each region. It remains a model that guarantees needs based on the assumptions considered in population adjustments, and it grants little additional effective fiscal responsibility. The proposal is indeed somewhat simpler than the current system. It streamlines the treasury of the regions by reducing the system of advance payments. Although the results are ultimately interpreted in terms of relative rather than absolute gains, this is a model that, based on providing more funding, allows for the declaration that all regions "win."
When determining results, the Ministry's proposal offers an additional increase for the Balearic Islands of 412 million (1.96% of the 21 billion), which, in relation to the total Balearic funding, is clearly below the current proportion of its capitation funding, which the Ministry itself places at 7.2% above the average, not 1.96%. This negative view is especially true when considering the Balearic Islands' contribution to financing these additional 21 billion in new tax revenues. According to available data, the Balearic Islands' implicit contribution to covering this total, ceterios paribusThe figure would range between €538 million and €709 million, depending on whether we consider its contribution to regional financing based on its per capita tax capacity (17% above the average) or its overall fiscal balance (22.4%). Both parameters yield figures significantly higher than the €412 million offered by the Ministry. However, FEDEA (Foundation for Applied Economic Studies) questions these final figures for the overall distribution among the autonomous communities in the proposal and, projecting the 2023 settlements, identifies the Balearic Islands as one of the communities that will benefit, with a 10.6% increase in total adjusted per capita financing. The relative improvement of some new elements is certainly acknowledged (higher personal income tax, higher VAT, Balearic SMEs' share of VAT exceeding their consumption indicators, announced participation in the new Climate Fund, etc.). But the modification made to the 'adjusted' population, about which little is known, and even less about the recalculation of the regulatory revenue that FEDEA is so demanding, may very likely be working against the Balearic Islands, both because of the actual revenue itself and because of the penalty established for tax reduction.
Loss of ordinal position
We emphasize that the final figures are not yet fully known (for 2027). In any case, in none of the ordinality rankings published to date, including in this newspaper, do the Balearic Islands regain their second-place ranking based on their tax contribution. Perhaps this is why the Vice President has verbally committed to respecting the ordinality with Catalonia, but not with the Balearic Islands. Above all, as we mentioned, the revision of the statutory revenue, which the Ministry says it will carry out, and any further modifications to the so-called 'adjusted population' remain pending. The Balearic Islands could lose significant resources in this revision (which may already be the reason for their low share of the additional funding proposed by the Ministry), since an upward adjustment of the statutory revenue would result in a larger contribution from the islands to the Guarantee Fund and less surplus for the Balearic Government, given its tax revenue. This recalculation may make sense in order to relatively penalize the tax cuts of the communities that opt for this type of exercise of tax autonomy, but it is not clear what effects it will have on the rest of the own and ceded taxes.
In any case, the increases in the share of Personal Income Tax (IRPF) and Value Added Tax (VAT), under the index based on the total relative consumption of the region (i.e., excluding VAT for school students and consumption solely by residents), preserve the consideration of the consumption of the transient population. An addendum for SME VAT is included, contingent upon confirmation of greater tax compliance by the region compared to other regions at this retail level, and participation in the new climate change fund is included (two-thirds for the Mediterranean basin). Both the Balearic Islands and Catalonia are interested in maintaining the 75% equalization and consolidating the current fiscal capacity in the face of proposals that aimed for 100%, eliminating any semblance of tax responsibility for the regions. In this respect, they have at least salvaged some of the situation.
The dangers of 'adjusted population'
The 'dangers' can always stem from the 'specter' of the adjusted population, which currently has a virtually neutral effect. This substitute for needs assessment, which defines variables and weights them somewhat arbitrarily, maintains a high degree of discretion in favor of the central government. In any case, for a regional government like the current one, which does not favor a model based on tax capacity, with greater fiscal responsibility and, consequently, the assumption of financial risk, this dangerous 'adjustment' will always be present. The State collects everything and transfers it as it sees fit. This may be more protective for the Balearic Government, given the acceptance that, from a fiscal perspective, there are no islanders in the Balearic Islands, but rather Spaniards who live there. This is, for the moment, the Balearic sense of belonging, as reflected today and in the past by parliamentary majorities, which weakens the financial demand for rebalancing the fiscal balance, which is the crux of the matter. Note that, unlike in the Balearic Islands, the Catalan Parliament now even requires its calculation in the presentation of the annual budgets; an agreement that is far from existing in the Balearic Parliament.
The recently presented financing proposal has an uncertain future. Its legal path is unclear, as is the willingness of the parties to accept changes, and how this might distort the initial acceptance of the proposal. It is up to the respective governments, and above all to civil society, to ensure that all this does not end in a new form of political trickery, which further discredits our ailing democracy and leaves things as they are.
