[Opinion] Catalonia’s fiscal feud with Spain

With an imminent face-to-face meeting between prime minister Pedro Sánchez and president Aragonès, the topic of Spanish economic domination, and the lack of fiscal federalism amongst its regions, is once again kicking off.

It’s not uncommon to hear accusations of Catalan financial greed as a motivation for secession. But the reality is, the economic relationship between Spain and Catalonia is a nuanced one, which many Catalans believe is historically, and still now, based on domination.

The main issue is that Catalonia pays a lot more tax than they receive back for public expenditure. According to economics professor Elisenda Paluzie, Catalan residents represent about 16 percent of the country’s population.

Yet these same residents contribute 20 percent of Spain’s taxes, and then receive 14 percent back for public expenses.

The common justification for this fiscal inequality is that the surplus money goes to poorer regions of Spain, such as Andalusia.

Here, people are generally poorer, so the argument goes that richer regions such as Catalonia should be supporting them. The problem with this argument is that whilst on a macroeconomic level Catalonia may be a wealthier region of Spain, not every individual in Catalonia is personally wealthy.

Whilst extra funding goes to the poorer regions of Spain, which is not the issue for most Catalans, insufficient funding goes to services in Catalonia. This means that whilst the richer Catalans may be able to get by, the poorer citizens of the region are left with what many believe are underfunded and inadequate social services.

Common complaints are centred around lengthy waiting times for healthcare, poor infrastructure, and expensive toll roads. This is despite the fact that Catalonia’s economy is around the same size of Portugal’s and is only fractionally smaller than Madrid’s.

Further dissent lies around questionable infrastructure projects funded by the national government which many Catalans argue are not in the best interest of the whole country.

Expensive high-speed rail projects which mostly are directed towards Madrid and connect towns with very small populations have been the face of this budgetary debate. Labeled by The Economist as being “poor value”, Spain has the second highest spanning of high speed rail lines in the world, second only to China.

But despite so much funding and construction of these lines, the Spanish government rejected a high speed line that would avoid Madrid and connect stations along the Mediterranean directly to Spanish ports, many of which are located in Catalonia.

Low-tax capital

Despite Madrid controlling the large majority of Spain’s economic decisions, the region’s income tax levels are the lowest in all of Spain, categorising the region as what many call a tax haven.

What many Catalans find frustrating is that they are criticised for lack of solidarity, yet they are paying more than the other regions, receiving less funding themselves, and most importantly, have minimal autonomy over fiscal matters.

This sentiment of economic domination has been felt in Catalonia ever since the war of the Spanish Succession in the 18th century, but was particularly antagonised when the 2006 autonomy statute was trimmed by more than 50 percent. The Constitutional Court then ruled 14 articles from the statute unconstitutional which, in turn, meant that Catalonia could not increase its funding powers.

A minimal say in the Spanish national context on economic decisions must be paired with the grim reality, for Catalans, of a minimal say in the European context.

Autonomous regions do not reap the same policy powers as federal units such as the German Länder, and many Catalans have felt like independence is their last option to have a sufficient influence over their economy.

Secession problems

This is not to say that independence would be a problem-free economic win for Catalonia.

If Catalonia was to secede, they would need a unilateral vote from member states, including that of Spain, to join the EU. Spain would almost certainly vote against and in turn, Catalonia would face expensive transition and trade costs with the EU – its biggest import and export partner.

Catalonia also has some of the highest regional levels of debt in Spain, adding another grey area to secession regarding who would pay for or absorb this debt. However, even with economic obstacles to overcome, the ERC are prioritising their road towards a Catalan republic and the reclaiming of the Catalan economy.

Aragonès, who has an impressive background in economics, is known for his calculated scrutiny of superfluous tax-spending, detailed in Spain’s Official Gazette. He has a master’s in economic history from the University of Barcelona, and is the former economy secretary of Catalonia.

Aragonès, and the pro-independence bloc, are expected to prioritise the rebuilding of Catalonia’s economy after the devastating effects of the pandemic on a region heavily-dependent on tourism.

What still is not certain, is how much say Madrid will have over the way this rebuilding transpires.