A few days after Alberto Núñez Feijóo and Pedro Sánchez try to gather support for the investiture, the reform of regional financing and a possible cancellation of the debt to Catalonia and other regions, it has slipped into the political debate, but the economist Angel de La Fuente, one of the main experts in regional financing, believes that it would not be a good idea.
“Forgiving the debt is not free, because the State would stay with it. It would only change hands and, in addition, it would generate an incentive problem,” explains the PhD in Economic Sciences from the University of Pennsylvania and executive director of the Fundación de Estudios of Applied Economics (Fedea) in an interview with EFE. According to the economist, if the debt were forgiven, the autonomous communities would confirm the “belief” that they “always” end up being bailed out financially and, therefore, De la Fuente assures, they would spend their funds more easily.
A system blocked since 2014
The regional financing system, that is, the mechanism through which the State gives money to the communities, works through two processes: payments on account, which is the money that the State gives to the autonomous communities based on what they they are expected to enter, and a settlement that is delivered after knowing the actual income. As the economist recalls, this system has not been reformed or updated since 2014.
“The truth is that these have been very difficult years for many reasons, the economic crisis, the pandemic, the war… But, apart from that, it is complicated because we are talking about distributing the money to the communities, according to the criteria and the way of doing it”, stresses De la Fuente. In addition, the executive director of Fedea points out that it is a political decision, something that does not simplify the situation.
Multiple renewal attempts
In order to reform this system, the economist explains that a law will have to be approved, but before that, its content is usually agreed upon in the Fiscal and Financial Policy Council and there is also a period of negotiations and proposals. According to De la Fuente, attempts have been made to take some steps to unblock regional financing: in 2017 two commissions were created, one for the reform of regional financing and another for the local one and, in 2021, the Treasury made a proposal to change the way in which the configured population is calculated -a mechanism to calculate how much money the State should give to each autonomy-.
“These proposals were not very well received and the process got stuck. Surely they did not see possibilities of reaching an agreement. We are talking about distribution criteria, so each community defends the things that interest it and it is very difficult to reach an agreement on that basis”, says De la Fuente, who was part of one of the commissions to review the regional financing model.
Forgiving the debt only to Catalonia: a high political cost
Faced with the possibility that the Government of Pedro Sánchez forgives the debt to Catalonia -and thus wins the support of Junts for the investiture-, regional barons such as López Miras from Murcia or Alfonso Rueda from Galicia have shown their disagreement. However, De la Fuente sees it as unlikely that the Executive will do it only with Catalonia: “I very much doubt that this can be done only for Catalonia. I would not be surprised if an agreement was reached to forgive part of the regional debt, which is not It seems like a good idea to me that it happened… But, if it does happen, it will surely be for all or for many autonomous communities.
Asked about what he thinks would be the best scenario for the Spanish economy, he points out that a “sensible” agreement for the financing reform would be “excellent news”, but he doubts the real probabilities of this happening. “It’s easier to reach an agreement to do things that probably aren’t a good idea, like canceling the debt,” he concludes.