The social cost of Catalonia’s fiscal deficit

EconomistWhile during the 1980-2016 period Catalonia maintained its economic influence —always contributing around 19% of Spanish GDP— and its relative position in terms of GDP per capita —around 120% of the average— what is there to complain about? After all, isn't its fiscal deficit offset by the trade surplus that it has with respect to the rest of Spain, as is often argued?

Starting with this second question, it's helpful to once again explain that it is an inverse relationship: the existence of a fiscal deficit requires a trade surplus, since if someone produces for 100 and has 90 to spend and invest, it will have to sell abroad more than it buys. On the other hand, to have a trade surplus does not require a fiscal deficit, as we can see in the case of Germany, which has an enormous foreign trade surplus and no fiscal deficit with the rest of the world. Or Catalonia itself, which today obtains a good part of its surplus thanks to its transactions with the rest of the world. In any case, what a foreign surplus means is production that exceeds domestic demand: everything that isn't consumed or invested domestically is sold abroad. And this brings us to a second question.

Without a fiscal deficit, Catalonia’s internal demand could be greater —whether through more investments, which would favor economic growth, or with higher salaries and public spending, which would allow for greater social welfare. As to higher investments and its effects, we would need a counterfactual analysis to find out where we would be without a fiscal deficit ... though the spectacular growth of Madrid might give us a clue. As to the effects of higher public spending, we have enough data to calculate the high social cost caused by the under-financing of the Catalan administration.

We have, for example, the European regional Social Progress Index, which was published for the first time in 2016 by the European Commission. Catalonia, which by per capita GDP occupied the 68th position among 272 European regions, dropped to the 163rd position in terms of social progress —behind eleven Spanish autonomous regions, eight of which had lower GDP per capita! And given that the Social Progress Index is calculated from data related to education, health, housing, environment ... and up to fifty factors that in overwhelming majority depend of public financing, it is clear that the fiscal deficit is largely responsible for this low level of social progress in Catalonia, as it also is in the Balearic Islands. For the same reason, it's not surprising that regions which typically receive fiscal transfers have a higher level of social progress. The same is true of Navarre and the Basque Country, thanks to their unique financial status agreements, which have much higher social progress scores, as well as Madrid, where its supposed fiscal deficit is more than compensated for by the much higher investments received.

On top of everything, low wages

Indeed, the lack of public spending in Catalonia, very often offset by private investments, has increased social costs: private schools and healthcare, highway tolls .... At the same time, it is an obstacle to social cohesion, to the extent that insufficiently funded public services push a part of society towards private alternatives. In addition, the trade surplus caused by the fiscal deficit requires a competitiveness that leads to lower salaries than would normally correspond to our productivity. That is, not only do we have fewer resources available to redistribute, but pre-distribution is also worse, as measured in the percentage of salary with respect to GDP. We will expand on this question in the next article.

In short, despite the fact that Catalonia has maintained economic influence and per capita GDP in relative terms, the current regional model has meant lower potential growth, as is made clear by the contrast with the Madrid region and its concentration of investment and spectacular growth. In addition, and most importantly, it has led to an enormous social cost that has fueled, more so than any flag-waving, a longing for radical change. The fact that this model also doesn't help less developed regions to edge closer to those which are more developed (that is, in addition to being unjust, it is inefficient) should be sufficient reason to completely reconsider the model. This will not happen via the so often praised ordinality, which assumes that the transfers will continue to be permanent as long as the community with greater GDP ends up receiving less funds; rather, it will happen by its replacement with convergence plans and, thus, by temporary and potentially reversible transfers. That is, that donors and recipients could one day exchange roles, as has happened in countries like Germany with the case of Bavaria, a former recipient and now a contributor.